ANNUAL FINANCIAL INFORMATION for the Fiscal Year Ended June 30, 2015

Transcription

1 ANNUAL FINANCIAL INFORMATION for the Fiscal Year Ended June 30, 2015 Relating to: DEPARTMENT OF AIRPORTS OF THE CITY OF LOS ANGELES LA/ONTARIO INTERNATIONAL AIRPORT $83,720,000 Refunding Revenue Bonds Series 2006A (TAX-EXEMPT) (AMT) $6,435,000 Refunding Revenue Bonds Series 2006B (TAXABLE) Dated as of: December 23, /

2 TABLE OF CONTENTS INTRODUCTION... 1 Official Statement and Prior Report... 1 Disclaimers... 1 DISCUSSION OF EVENTS... 2 Listed Events... 2 FURTHER INFORMATION... 3 FINANCIAL AND OPERATING INFORMATION... 4 Comparison of Four Airports in Airport System... 4 OPERATING DATA FOR THE AIRPORT SYSTEM... 4 Aviation Activity... 5 AIR TRAFFIC DATA... 5 Passenger Enplanements and Airline Market Shares... 6 HISTORICAL TOTAL ENPLANEMENTS BY AIRLINE... 6 TOTAL REVENUE LANDED WEIGHT BY AIRLINE... 7 Air Cargo... 8 CARGO TRAFFIC DATA AIR CARGO ON AND OFF... 8 HISTORICAL ENPLANED AND DEPLANED AIR FREIGHT... 9 Summary of Operating Statements HISTORICAL OPERATING STATEMENTS Revenue Diversity TOP TEN REVENUE PRODUCERS Investment Practices of the City Treasurer CITY OF LOS ANGELES POOLED INVESTMENT FUND Landing Fees and Building Rental AUDITED FINANCIAL STATEMENTS CERTIFICATION... S /

3 INTRODUCTION This Annual Financial Information (this Report ), including the cover page, is being furnished by the Department of Airports of the City of Los Angeles (the Department ) to provide updated financial and operating information of the Department of the type included in the final official statement for the: $83,720,000 aggregate principal amount of Ontario International Airport Refunding Revenue Bonds Series 2006A (the 2006A Bonds ); and $6,435,000 aggregate principal amount of Ontario International Airport Refunding Revenue Bonds Series 2006B (the 2006B Bonds and together with the 2006A Bonds, the Bonds ). This Report is provided pursuant to covenants made by the Department in connection with the issuance of the Bonds pursuant to that certain Continuing Disclosure Certificate dated as of October 1, 2006 (the Continuing Disclosure Certificate ). Official Statement and Prior Reports For further information and a more complete description of the Bonds, reference is made to the Official Statement for the Bonds dated October 17, 2006 (the Official Statement ) and the Department s previous reports of annual financial information beginning with the report for the Fiscal Year ended June 30, 2007 (the Prior Reports ), each of which speaks only as of its respective date. Capitalized terms used but not defined in this Report have the meanings given to them in the Official Statement. Disclaimers To the extent the Department provides information in this Report that the Department is not obligated to present or update, the Department is not obligated to present or update such information in future reports of annual financial information. Except as set forth in this Report, the Department has not updated any information contained in the Prior Reports. Investors are advised to refer to the Official Statement for information concerning the initial issuance of and security for the Bonds. THE BONDS ARE SPECIAL OBLIGATIONS OF THE DEPARTMENT, PAYABLE SOLELY FROM AND SECURED BY A PLEDGE OF NET PLEDGED REVENUES DERIVED BY THE DEPARTMENT FROM THE OPERATIONS OF LA/ONTARIO INTERNATIONAL AIRPORT ( LA/ONT ) AND CERTAIN LIMITED FUNDS AND ACCOUNTS AS DESCRIBED IN THE OFFICIAL STATEMENT. NONE OF THE PROPERTIES OF THE AIRPORT SYSTEM IS SUBJECT TO ANY MORTGAGE OR OTHER LIEN FOR THE BENEFIT OF THE OWNERS OF THE BONDS, AND NEITHER THE FULL FAITH AND CREDIT NOR THE TAXING POWER OF THE DEPARTMENT OR THE CITY OF LOS ANGELES (THE CITY ) IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF, PREMIUM, IF ANY, OR INTEREST ON THE BONDS. By providing the information in this Report, the Department does not imply or represent (a) that all information provided in this Report is material to investors decisions regarding investment in the Bonds, (b) the completeness or accuracy of any financial, operational or other information not included in this Report or in the Official Statement (except as such material may be incorporated in this Report), (c) that no changes, circumstances or events have occurred since the dated date of the information provided or incorporated in this Report (other than as contained in this Report) or (d) that no other information exists which may have a bearing on the Department s financial condition, the security for the Bonds or an investor s decision to buy, sell or hold the Bonds. The information set forth in this Report and incorporated hereby has been furnished by the Department and is believed to be accurate and reliable but is not guaranteed as to accuracy or completeness. Statements contained in or incorporated by this Report which involve estimates, forecasts or other matters of opinion, whether or not expressly so described in this Report, are intended solely as such and are not to be construed as representations of fact. Further, expressions of opinion contained in this Report or incorporated hereby are subject to change without notice and the delivery of this Report will not, under any circumstances, create any implication that there has been no change in the affairs of the Department. Due to its date of publication, certain information contained in this Report, including information concerning prior years, has been updated and is more current than some of the information contained in the Annual Financial Report (as defined below), previous audited financial statements and Prior Reports of the Department, including, but not limited to, the unaudited information therein /

4 No statement contained in this Report should be construed as a prediction or representation about future financial performance of the Department. Historical results presented in this Report may not be indicative of future operating results. DISCUSSION OF EVENTS Listed Events Except as provided in that certain Notice of Partial Redemption dated April 15, 2015, Notice of Ratings Change dated October 22, 2015 and that certain Notice Regarding Pending Litigation ( Notice Regarding Pending Litigation ) dated October 27, 2015 each of which was filed with the Municipal Securities Rulemaking Board on its Electronic Municipal Market Access website, the Department hereby reports that none of the following events has occurred since the date of the Department s last Annual Financial Information, with respect to the Bonds: Recent Events principal and interest payment delinquencies; non-payment related defaults; modifications to rights of bond holders; optional, contingent or unscheduled bond calls; defeasances; rating changes; adverse tax opinions or events adversely affecting the tax exempt status of the Bonds; unscheduled draws on the debt service reserves reflecting financial difficulties; unscheduled draws on the credit enhancements reflecting financial difficulties; substitution of credit or liquidity providers, or any failure by any credit or liquidity provider to perform; release, substitution or sale of property securing repayment of the Bonds. LA/ONT Litigation Settlement On June 3, 2013 the City of Ontario, California filed a complaint (the Ontario Litigation ) against the City, the Department, and the Board, seeking, among other things, (i) damages for the alleged breach of contract, breach of implied covenant of good faith and fair dealing and breach of fiduciary duty in connection with the Department s operation and management of LA/Ontario International Airport ( LA/ONT ); and (ii) to rescind or reform the agreements under which the Department obtained ownership and control of LA/ONT from the City of Ontario. Recently, the City of Ontario, the City, the Department, the Board and Ontario International Airport Authority ( OIAA ), a joint powers authority of the County of San Bernardino and the City of Ontario, have entered into a settlement agreement (the ONT Settlement Agreement ) which, among other things, provides for, subject to the terms of the ONT Settlement Agreement: the City to transfer, assign and deliver to OIAA the City s right, title and interest in and to certain of the assets, properties, rights and interests solely used or held solely for use in connection with the Department s operation of LA/ONT, including: o certain real property, improvements and equipment comprising LA/ONT and certain surrounding parcels; o certain contractual or entitlement rights, comprised of leases, contracts, grant agreements and entitlements; o certain accounts receivable and cash remaining in the accounts of LA/ONT after the (i) transfer of certain passenger facility charges, (ii) transfer of $40 million from LA/ONT accounts to other Department non-la/ont accounts, and (iii) use of the funds in the reserve fund established for the Bonds to discharge the outstanding LA/ONT Bonds, all as provided in the ONT Settlement Agreement; the development of a Staff Augmentation Agreement and a Department Employee Protection and Transition Plan; termination and rescission of the joint powers agreement of the City and the City of Ontario; dismissal with prejudice of the Ontario Litigation; /

5 dismissal with prejudice by the City of Ontario of its claims in City of Inglewood, et al. v. City of Los Angeles, et al., and Alliance for a Regional Solution to Airport Congestion, et al. v. City of Los Angeles, et al. (the ARSAC Litigation ); dismissal with prejudice by the County of San Bernardino of its claims in the ARSAC Litigation; certain reimbursement payments and transfers of funds to the Department, including: o $30 million from the City of Ontario to the City for the benefit of the Department to be used for the capital and operating expenses of the airport system owned and operated by the Department (other than LA/ONT); o $40 million from the unrestricted cash LA/ONT accounts to other Department non- LA/ONT accounts (as described above) to be used for the capital and operating expenses of the airport system owned and operated by the Department (other than LA/ONT); o $120 million from OIAA to the Department, over a period of approximately 10 years and subject to certain conditions and limitations, including that a portion thereof may be paid by the transfer of certain previously collected passenger facility charges; and o funds from OIAA sufficient, together with amounts available in the applicable bond reserve fund, to cause the discharge of the Bonds (as described above). The transfer of sponsorship, ownership and control of LA/ONT is subject to the approval by the Federal Aviation Administration. The foregoing description of the ONT Settlement Agreement is qualified in its entirety by reference to the ONT Settlement Agreement. Copies of the ONT Settlement Agreement may be obtained upon request from the Department. FURTHER INFORMATION For further information regarding this Report, please address your questions to: City of Los Angeles Department of Airports P.O. Box Los Angeles, CA Attn: Ryan Yakubik, Chief Financial Officer (424) or City of Los Angeles Department of Airports P.O. Box Los Angeles, CA Attn: Alina Slamar, Finance & Budget Division (424) [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] /

6 FINANCIAL AND OPERATING INFORMATION Comparison of the Airports in Airport System By way of comparison of the airports in the Airport System, certain operating data for each of these airports is set forth below. The Department uses the method of counting passengers and cargo that is used by the Airports Council International, the effect of which is to include transit passengers and cargo. Revenues from other airports in the Airport System are not available to pay the principal of or interest on the Bonds. LA/ONT revenues are not available for the payment of debts or liabilities incurred by other airports in the Airport System. TABLE 3 DEPARTMENT OF AIRPORTS OF THE CITY OF LOS ANGELES OPERATING DATA FOR THE AIRPORT SYSTEM FISCAL YEAR 2015 (1) Net Operating Revenues (000) (2) Enplanements and Deplanements Aircraft Arrivals and Departures Total Landed Weight Enplaned/Deplaned (000 Lbs.) (3) Airport Cargo (Tons) LAX $ 400,402 72,077, ,631 55,001,147 2,110,540 LA/ONT 4,263 4,165,442 64,075 4,692, ,349 VNY 4, , LA/PMD (4) Total (5) $ 409,524 76,243, ,848 59,737,749 2,593,889 (1) Derived from unaudited financial statements. Due to its date of publication, certain information contained in this table is more current than certain information contained in the audited financial statements of the Department for Fiscal Year (2) Operating revenues less operating expenses, before depreciation. Net Operating Revenues is defined the Master Indenture and may vary from the definition of the term Net Pledged Revenues as defined in the Master Indenture. (3) Reflects landed weight for revenue-generating landings only. (4) Currently there is no scheduled service at LA/PMD. (5) Numbers may not add due to rounding. Source: Department of Airports of the City of Los Angeles /

7 Aviation Activity The following table presents historical total operations (landings and takeoffs) and total domestic and international enplanements and deplanements at LA/ONT for Fiscal Years 2005 through 2015: TABLE 6 DEPARTMENT OF AIRPORTS OF THE CITY OF LOS ANGELES LA/ONTARIO INTERNATIONAL AIRPORT AIR TRAFFIC DATA Revenue Operations Enplanements and Deplanements Fiscal Year (1) Total Operations Operations Growth Domestic (2) International (2) Total (2) Passenger Growth , ,904, ,497 7,020, ,569 (0.6) 7,060, ,760 7,199, , ,930, ,319 7,054,709 (2.0) , ,029,875 71,583 7,101, ,876 (26.4) 5,198,602 68,803 5,267,405 (25.8) ,151 (10.0) 4,784,137 38,370 4,822,507 (8.4) ,200 (7.6) 4,684,492 38,598 4,723,090 (2.1) ,839 (4.7) 4,340,032 66,010 4,406,042 (6.7) ,663 (6.1) 4,073,017 53,289 4,126,306 (6.3) ,042 (1.0) 3,933,598 73,852 4,007,450 (2.9) , ,048, ,324 4,165, (1) Fiscal Year ended June 30. (2) Enplaned and deplaned passengers. Source: Department of Airports of the City of Los Angeles, California /

8 Passenger Enplanements and Airline Market Shares The following table shows historical total enplanements by airline for Fiscal Years 2011 to 2015: TABLE 7 DEPARTMENT OF AIRPORTS OF THE CITY OF LOS ANGELES LA/ONTARIO INTERNATIONAL AIRPORT (RANKED BY FISCAL YEAR 2015 RESULTS) HISTORICAL TOTAL ENPLANEMENTS BY AIRLINE (1) Fiscal Year 2011 Fiscal Year 2012 Fiscal Year 2013 Fiscal Year 2014 Fiscal Year 2015 Airline Enplanements Share (2) Enplanements Share (2) Enplanements Share Enplanements Share (2) Enplanements Share 1 Southwest Airlines 1,259, % 1,168, % 1,151, % 1,151, % 1,191, % 2 US Airways 197, , , , , American Airlines (3) 203, , , , , United Airlines (4) 194, , , , , Alaska Airlines 129, , , , , Delta Airlines (5) 79, , , , , Aerovias De Mexico SADECV 19, , , , , Volaris (6) , , Miami Air International (7) Republic Airlines Inc (7) Subtotal 2,084, ,081, ,061, ,002, ,084, Other 276, , , , , Airport Total 2,361, % 2,209, % 2,065, % 2,003, % 2,085, % (1) (2) (3) (4) (5) (6) (7) For those airlines that (i) were party to a completed merger or acquisition, (ii) have received a single FAA certificate and (iii) have completed operational integration, only the surviving entity is presented and the activity for the airlines that are now a part of the surviving airline are included in the information presented. Totals may not add due to rounding. Includes SkyWest Airlines operating as American Eagle. Includes SkyWest Airlines operating as United Express. Includes SkyWest Airlines operating as Delta. Concessionaria Vuela Compania de Aviacion SAPI decv Unscheduled carrier at LA/ONT, but may land if circumstances require. Source: Department of Airports of the City of Los Angeles, California /

9 The following table presents the total revenue landed weight for the top 10 air carriers at LA/ONT for Fiscal Year 2015: TABLE 8 TOTAL REVENUE LANDED WEIGHT BY AIRLINE LA/ONTARIO INTERNATIONAL AIRPORT (IN THOUSAND POUNDS) (1) Airline Fiscal Year 2015 % of 2015 Total (2) United Parcel Service 1,789, % Southwest Airlines 1,337, Federal Express Corp 549, US Airways Inc 244, American Airlines (3) 194, Alaska Airlines 175, United Airlines (4) 171, Delta Airlines (5) 94, Aerovias De Mexico SADECV 33, Volaris (6) 25, SUBTOTAL 4,614, Others 77, Grand Total 4,692, % (1) For those airlines that (i) were party to a completed merger or acquisition, (ii) have received a single FAA certificate and (iii) have completed operational integration, only the surviving entity is presented and the activity for the airlines that are now a part of the surviving airline are included in the information presented. (2) Percentages may not add to total due to rounding. (3) Includes SkyWest Airlines operating as American Eagle. (4) Includes SkyWest Airlines operating as United Express. (5) Includes SkyWest Airlines operating as Delta. (6) Concesionaria Vuela Compania de Aviacion SAPI decv Source: Department of Airports of the City of Los Angeles, California /

10 Air Cargo The following table provides information concerning cargo traffic data at LA/ONT over the last ten Fiscal Years: TABLE 9 LA/ONTARIO INTERNATIONAL AIRPORT CARGO TRAFFIC DATA AIR CARGO ON AND OFF (IN METRIC TONS) (1) Fiscal Year Total Freight Total Mail Total Cargo (2) ,186 14, , ,380 19, , ,193 12, , ,355 17, , ,772 18, , ,581 16, , ,571 17, , ,788 18, , ,114 15, , ,386 20, ,349 (1) Restated. Certain updates have been made to Fiscal Years due to reclassifying and correcting entries of cargo traffic data. (2) Totals may not add to total due to rounding. Source: Department of Airports of the City of Los Angeles, California /

11 The following table shows the historical enplaned and deplaned air freight at LA/ONT for the last five Fiscal Years: TABLE 10 LA/ONTARIO INTERNATIONAL AIRPORT HISTORICAL ENPLANED AND DEPLANED (1) AIR FREIGHT (RANKED BY FISCAL YEAR 2015 RESULTS) (IN METRIC TONS) Fiscal Year 2011 Fiscal Year 2012 Fiscal Year 2013 Fiscal Year 2014 Fiscal Year 2015 Freight Freight Freight Freight Freight Airline Weight Share (2) Weight Share (2) Weight Share (2) Weight Share (2) Weight Share (2) 1. United Parcel Service 249, % 301, % 306, % 322, % 335, % 2. Federal Express Corp. 114, , , , , West Air 2, , , , , Southwest Airlines 2, , , , , Ameriflight LLC 1, , , , , Subtotal 371, , , , , All Others 2, , , , , Total 374, % 429, % 436, % 454, % 462, % (1) Both enplaned and deplaned air freight have previously been included in the Official Statement and Prior Reports. (2) Totals may not add to total due to rounding. Source: Department of Airports of the City of Los Angeles, California /

12 Summary of Operating Statements The following table summarizes the financial results from operations for LA/ONT for Fiscal Years 2011 through 2015: TABLE 11 LA/ONTARIO INTERNATIONAL AIRPORT HISTORICAL OPERATING STATEMENTS (DOLLARS IN THOUSANDS) 2011 (1) 2012 (1) 2013 (1) 2014 (1) 2015 OPERATING REVENUE Aviation Revenue Landing Fees $ 12,096 $ 10,211 $ 11,304 $ 11,774 $ 12,140 Building rentals 23,124 20,991 23,287 17,766 17,346 Other aviation revenue 3,641 3,631 4,093 2,979 3,164 Total aviation revenue 38,861 34,833 38,684 32,519 32,650 Concession Revenue 27,290 25,901 24,497 23,536 23,535 Other Operating Revenue TOTAL OPERATING REVENUE $ 66,886 $ 61,296 $ 63,849 $ 56,659 $ 56,880 OPERATING EXPENSES Salaries and benefits (2) $ 30,026 $ 29,612 $ 28,128 $ 25,735 $ 25,701 Contractual services 14,852 15,482 16,115 12,780 11,217 Material and supplies 3,889 3,167 3,556 3,347 3,211 Utilities 4,110 3,808 4,087 4,170 4,254 Other operating expenses 1,424 1,279 1,233 1,190 1,302 Allocated Administrative Charges 8,129 7,908 7,907 7,160 6,932 TOTAL OPERATING EXPENSES BEFORE DEPRECIATION $ 62,430 $ 61,256 $ 61,026 $ 54,382 $ 52,617 Income (loss) from operations before depreciation and amortization $ 4,456 $ 40 $ 2,823 $ 2,277 $ 4,263 Less depreciation and amortization 23,472 23,427 20,523 19,975 18,990 OPERATING INCOME (LOSS) $ (19,016) $ (23,387) $ (17,700) $ (17,698) $ (14,727) NONOPERATING REVENUES AND EXPENSES Passenger facility charges $ 10,263 $ 9,326 $ 5,902 $ 3,471 $ 3,611 Customer facility charges (2) 3,571 3,641 3,601 3,670 3,838 Interest and Investment Income 2,546 3, ,071 1,740 Interest Expense (3,761) (3,632) (3,479) (3,311) (2,711) Other nonoperating revenue 538 1, Other nonoperating expenses (1,731) (65) Net Nonoperating Revenues $ 11,426 $ 13,572 $ 6,447 $ 6,680 $ 7,035 INCOME (LOSS) BEFORE CAPITAL GRANT CONTRIBUTIONS $ (7,590) $ (9,815) $ (11,253) $ (11,018) $ (7,692) Capital grant contributions 3, ,646 CHANGE IN NET POSITION $ (4,246) $ (9,815) $ (11,253) $ (10,733) $ (5,046) Net position, beginning of year Change in accounting principle and adjustment of an amount due from LA/ONT 429, , ,654 (16,887) 387, ,781 (38,660) (3) Net position, end of year $ 425,469 $ 415,654 $ 387,514 $ 376,781 $ 333,075 (1) Restated. Certain reclassifications have been made to conform to Fiscal Year 2015 presentation. (2) Department employees participate in the Los Angeles City Employees Retirement System ( LACERS ), a contributory plan, established under the Charter. The LACERS plan is the obligation of the City. Under the Charter, the Department makes contributions to LACERS with respect to its employees in amounts determined by LACERS and its actuaries. The Department does not participate in the governance or management of LACERS. For information regarding LACERS unfunded actuarial accrued liability with respect to retirement benefits and health subsidy benefits, the actuarial value of LACERS total system assets, the market value of LACERS total system assets, the valuation value of LACERS retirement system assets, the market value of LACERS retirement system assets, the valuation value of LACERS retiree health assets, the market value of LACERS retiree health assets and the valuation value of LACERS total funded ratio and the City s projected contributions to LACERS for the next four years and related assumptions regarding LACERS, the City s projections of contribution rates and required annual contributions, LACERS s application of Governmental Accounting Standards Board Statements No. 67 (Financial Reporting for Pension Plans) and No. 68 (Accounting and Financial Reporting for Pensions), and additional information regarding LACERS and the Department s obligations in connection therewith, see the Official Statement of the Department dated November 5, 2015 (the LAX Official Statement ), relating to the Department s Los Angeles International Airport, Senior Revenue Bonds, 2015 Series D and 2015 Series E, THE DEPARTMENT OF AIRPORTS Retirement Plan, FINANCIAL AND OPERATING INFORMATION CONCERNING LAX Management Discussion of Fiscal Year 2015, APPENDIX G CERTAIN INFORMATION REGARDING THE CITY OF LOS ANGELES and Note 2 of the Annual Financial Report. The LAX Official Statement speaks only as of its date, has been filed with the Municipal Securities Rulemaking Board on its Electronic Municipal Market Access website and may be obtained at (3) Primarily comprised of the proportional allocation of the City s Net Pension Liability. See footnote 2 above. Source: Audited Financial Statements of Los Angeles World Airports (Department of Airports of the City of Los Angeles, California) Ontario International Airport for the Fiscal Years ended June 30, 2011 June 30, /

13 Revenue Diversity The following table sets forth the top ten revenue providers for LA/ONT for Fiscal Year 2015: TABLE 12 TOP TEN REVENUE PRODUCERS (1) AT LA/ONTARIO INTERNATIONAL AIRPORT FISCAL YEAR 2015 (DOLLARS IN THOUSANDS) Percentage of Operating Revenues Revenues (2) 1. Southwest Airlines Co. $ 14, % 2. United Parcel Service 5, Federal Express Corp. 2, US Airways Inc. 2, American Airlines Inc. (3) 2, The Hertz Corporation 2, Alaska Airlines Inc. 2, Vanguard Car Rental USA LLC 2, United Airlines Inc. 2, Enterprise Rent-A-Car Company of Los Angeles LLC 1, (1) Derived from unaudited financial statements; excludes revenue from the federal government. The amounts in this table reflect those billed by the Department to the applicable revenue provider as of June 30, For those airlines that (i) were party to a completed merger or acquisition, (ii) have received a single FAA certificate and (iii) have completed operational integration, only the surviving entity is presented and the activity for the airlines that are now a part of the surviving airline are included in the information presented. (2) Percentages are calculated as Revenues divided by Total Operating Revenue for Fiscal Year 2015 from Table 11. (3) Includes SkyWest Airlines operating as American Eagle. Source: Department of Airports of the City of Los Angeles, California /

14 Investment Practices of the City Treasurer All moneys held in the Airport Revenue Fund are currently invested by the City Treasurer in investments authorized by State law. The City Treasurer invests temporarily idle cash for the City, including that of the Department, as part of a pooled investment program (the Pool ) which combines general receipts with special funds for investment purposes and allocates interest earnings on a pro rata basis when the interest is earned and distributes interest receipts based on the previously established allocations.. Below is a summary of assets of the Pool as of June 30, 2015: TABLE 13 CITY OF LOS ANGELES POOLED INVESTMENT FUND (1) ASSETS AS OF JUNE 30, 2015 (Dollars in Millions) Department Market Value (3) LA/ONT Market Value (4) Description Market Value (2) % of Total Bank Deposits $ % $ 18 $ 2 CDARS Commercial Paper 1, Corporate Notes U.S. Federal Agencies/Munic/Supras Total Short-Term Core Portfolio: $ 1, % $ 309 $ 26 Corporate Notes 1, U.S. Federal Agencies/Munic/Supras U.S. Treasuries 4, Total Long-Term Reserve Portfolio $ 6, % $ 1,339 $ 116 Total Cash & Pooled Investments $ 8, % $ 1,648 $ 142 (1) Derived from unaudited financial statements; based on General Portfolio Asset Holdings provided by Office of Finance. (2) Total amount held by the City in the Pool, including the funds of other departments. (3) The Department s share of the Pool, including restricted assets; allocated by Financial Reporting Division of the Department. (4) Inclusive of restricted cash; fund not segregated from other funds in the Pool; allocated by Financial Reporting Division of the Department. Source: Office of Finance, City of Los Angeles and Department of Airports of the City of Los Angeles, California. The average life of the investment portfolio in the Pool as of June 30, 2015 was approximately 2.3 years. Landing Fees and Building Rental The landing fee for LA/ONT for Fiscal Year 2015 was $2.57 per thousand pounds landed weight. The terminal rental rate for Fiscal Year 2015 was $ per square foot for airlines which have entered into operating use and terminal lease agreements with the Department ( Signatory Airlines ) and $ per square foot for non-signatory Airlines. The average airline payment per enplaned passenger was $ /

15 AUDITED FINANCIAL STATEMENTS A copy of the Ontario International Airport Annual Financial Report, Fiscal Year Ended June 30, 2015, of the Department of Airports Los Angeles, California (the Annual Financial Report ) is filed with and hereby made part of this Report. Due to its date of publication, certain information in the Report is more current than some of the information contained in the Financial Statements, including but not limited to the unaudited information identified as such therein. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] /

16 CERTIFICATION The undersigned hereby states and certifies that: 1. I am the duly appointed, qualified, and acting Chief Financial Officer of the Department, familiar with the facts herein certified, and I am authorized to certify the same on behalf of the Department. 2. The execution and delivery of this Report to the Municipal Securities Rulemaking Board have been duly authorized by the Department. 3. This certification is being provided in connection with this Report being delivered by the Department pursuant to the Continuing Disclosure Certificate. 4. The statements and information contained in this Report are true, correct, and complete in all material respects and, as of the date hereof, this Report does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. THE DEPARTMENT OF AIRPORTS OF THE CITY OF LOS ANGELES By: /s/ Ryan Yakubik Name: Ryan Yakubik Its: Chief Financial Officer / S-1

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20 BOARD OF AIRPORT COMMISSIONERS, ELECTED CITY OFFICIALS, AND LOS ANGELES WORLD AIRPORTS STAFF Sean O. Burton Valeria C. Velasco Gabriel L. Eshaghian Nolan V. Rollins Beatrice C. Hsu Jeffery J. Daar Cynthia A. Telles President Vice President Commissioner Commissioner Commissioner Commissioner Commissioner CITY OF LOS ANGELES LOS ANGELES WORLD AIRPORTS Eric Garcetti Mayor Mike Feuer City Attorney Ron Galperin City Controller LOS ANGELES CITY COUNCIL Herb J. Wesson, Jr. President District 10 Mitchell Englander President Pro Tempore District 12 Nury Martinez Assistant President Pro Tempore District 6 Gilbert A. Cedillo District 1 Paul Krekorian District 2 Bob Blumenfield District 3 David E. Ryu District 4 Paul Koretz District 5 Felipe Fuentes District 7 Marqueece Harris-Dawson District 8 Curren D. Price, Jr. District 9 Mike Bonin District 11 Mitch O Farrell District 13 José Huizar District 14 Deborah Flint Executive Director Stephen Martin Chief Operating Officer Debbie Bowers Deputy Executive Director Commercial Development Cynthia Guidry Deputy Executive Director Capital Programming, Planning & Engineering Roger Johnson Deputy Executive Director Airports Development Samson Mengistu Deputy Executive Director Administration Dominic Nessi Deputy Executive Director Information Management & Technology Patrick Gannon Deputy Executive Director Law Enforcement & Homeland Security Chief, Airports Police Wei Chi Deputy Executive Director Comptroller David Shuter Deputy Executive Director Facilities Maintenance & Utilities Jacqueline Yaft Deputy Executive Director Operations, Maintenance & Emergency Management Ryan Yakubik Chief Financial Officer Raymond Ilgunas General Counsel Silveria Silva Accounting Operations Jess Romo Airport Manager, ONT/VNY Barry Rondinella Airport Operations Janet Hackney Airports Development Contracts & Budget Shirlene Sue Airport Permit Services Sandy Miller Board Office Maria Tesoro-Fermin Community Relations Robert Loya Construction Inspection Edward Bushman Emergency Management Lisa Trifiletti Environmental Services Nerida Esguerra Finance & Budget Valerie Hunter Financial Management Systems Rosalyn Wong Financial Reporting Mark Adams Government Affairs Barbara Yamamoto Guest Services Paula Adams Human Resources Tony Chen Information Management & Technology Architecture Micaela LeBlanc Information Management & Technology Business Application Support Aura Moore Information Management & Technology Business Systems Nathan Look Information Management & Technology Infrastructure Mary Albers Information Management & Technology Planning Anson Fong Information Management & Technology Security (Interim) Amanda Dyson Internal Audit Marisa Katnich Landside Business Management Ramon Oliveres Leasing & Development Ralph Morones Maintenance Services Karen Tozer Procurement Services Mary Grady Public & Media Relations Bruce Brown Risk Management David Jones Terminals Business Management Jeffrey Smith Utilities & Infrastructure Joe Buscaino District 15 LA/Ontario International Airport FY 2015 Annual Financial Report

21 Message from the Executive Director I am pleased to present the Annual Financial Report of the LA/Ontario International Airport (ONT) for the fiscal year ended June 30, Macias Gini & O Connell LLP, Certified Public Accountants (MGO), audited ONT s financial statements. Based upon its audit, MGO rendered an unmodified opinion that ONT s financial statements, as of and for the fiscal years ended June 30, 2015 and 2014, were fairly presented in conformity with accounting principles generally accepted in the United States of America (GAAP). MGO s report is on pages 1 and 2. MGO conducted an additional audit to determine ONT s compliance with the requirements described in the Passenger Facility Charge Audit Guide for Public Agencies and concluded that ONT complied in all material respects with the requirements that could have a material effect on its passenger facility charge program for the fiscal year ended June 30, MGO s report is on pages 63 and 64. MGO also conducted a third audit to determine ONT s compliance with the requirements described in the California Civil Code Section 1936, as amended by Senate Bill 1192 and Assembly Bill 359, and concluded that ONT complied in all material respects with the requirements that could have a material effect on its customer facility charge program for the fiscal year ended June 30, MGO s report is on pages 69 and 70. GAAP requires that management provide a narrative introduction, overview, and analysis to accompany the financial statements in the form of Management s Discussion and Analysis (MD&A). The MD&A is on pages 3 through 19. ONT is a medium hub, full-service airport with commercial jet service to major United States cities and through service to international destinations. ONT s service area includes a population of six million people living in San Bernardino and Riverside counties and portions of north Orange County and east Los Angeles County areas that experienced significant job growth in In 2015, 4.2 million passengers used the airport and 462,386 tons of airfreight was shipped. ONT s more than 120 daily flights provide service to and from major cities in the United States and Mexico. ONT saw continued recovery in passenger traffic in fiscal year 2015, with total passenger levels rising 4.0% over fiscal year International traffic growth was particularly strong as a result of increased passenger service to Mexico. Management continues to exercise its best efforts to attract and obtain additional regular scheduled airline service for ONT to continue this trend. Deborah Flint Executive Director LA/Ontario International Airport FY 2015 Annual Financial Report

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23 Los Angeles World Airports (Department of Airports of the City of Los Angeles, California) LA/Ontario International Airport Annual Financial Report Fiscal Years Ended June 30, 2015 and 2014 Table of Contents Financial Section Page Independent Auditor s Report...1 Management s Discussion and Analysis (Required Supplementary Information - Unaudited)...3 Financial Statements Statements of Net Position Statements of Revenues, Expenses and Changes in Net Position Statements of Cash Flows...24 Notes to the Financial Statements (Index Page 27) Required Supplementary Information Schedule of ONT s Proportionate Share of the Net Pension Liability Schedule of Contributions Compliance Section Independent Auditor s Report on Compliance with Applicable Requirements of the Passenger Facility Charge Program and Internal Control Over Compliance Schedule of Passenger Facility Charge Revenues and Expenditures Notes to the Schedule of Passenger Facility Charge Revenues and Expenditures Independent Auditor s Report on Compliance with Applicable Requirements of the Customer Facility Charge Program and Internal Control Over Compliance Schedule of Customer Facility Charge Revenues and Expenditures...71 Notes to the Schedule of Customer Facility Charge Revenues and Expenditures LA/Ontario International Airport FY 2015 Annual Financial Report

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25 Financial Section

26 Financial Section Contents INDEPENDENT AUDITOR S REPORT MANAGEMENT S DISCUSSION AND ANALYSIS FINANCIAL STATEMENTS REQUIRED SUPPLEMENTARY INFORMATION

27 Certified Public Accountants Sacramento Walnut Creek Oakland Los Angeles To the Members of the Board of Airport Commissioners City of Los Angeles, California INDEPENDENT AUDITOR S REPORT Century City Newport Beach San Diego Report on the Financial Statements We have audited the accompanying financial statements of the LA/Ontario International Airport (ONT), a department component of Los Angeles World Airports (Department of Airports of the City of Los Angeles, California) (LAWA), an Enterprise Fund of the City of Los Angeles (City), as of and for the fiscal years ended June 30, 2015 and 2014, and the related notes to the financial statements, as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ONT as of June 30, 2015 and 2014, and the changes in its financial position and its cash flows for the fiscal years then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matters Basis of Presentation As discussed in Note 1, the financial statements of ONT are intended to present the financial position, the changes in financial position, and cash flows of only that portion of the business-type activities and each major fund of the City that is attributable to the transactions of ONT. They do not purport to, and do not, present fairly the financial position of LAWA or the City as of June 30, 2015 and 2014, the changes in their financial position, or, where applicable, their cash flows for the fiscal years then ended in conformity with accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. Change in Accounting Principles As described in Notes 1 and 2, effective July 1, 2014, ONT adopted the provisions of Governmental Accounting Standards Board (GASB) Statement No. 68, Accounting and Financial Reporting for Pensions an Amendment of GASB Statement No. 27, and GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date an Amendment of GASB Statement No. 68. The implementation of these statements resulted in a restatement of net position as of July 1, 2014, in the amount of $38.7 million. The net position as of July 1, 2013 was not restated because all of the information available to restate prior year amounts was not readily available. Our opinion is not modified with respect to this matter. LA/Ontario International Airport FY 2015 Annual Financial Report 1

28 Independent Auditor s Report (continued) Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis on pages 3 to 19, the schedule of ONT s proportionate share of the net pension liability on page 59, and the schedule of contributions pension on pages 60 to 62 be presented to supplement the financial statements. Such information, although not part of the financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the financial statements, and other knowledge we obtained during our audits of the financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audits were conducted for the purpose of forming an opinion on the financial statements of ONT. The accompanying compliance section listed in the table of contents is presented for purposes of additional analysis and is not a required part of the financial statements. The accompanying Schedule of Passenger Facility Charge Revenues and Expenditures and accompanying notes on pages 65 to 67; and Schedule of Customer Facility Charge Revenues and Expenditures and accompanying notes on pages 71 to 72 (collectively Information) are the responsibility of management and were derived from, and relate directly to, the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the Information is fairly stated in all material respects in relation to the financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated November 5, 2015, on our consideration of LAWA s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering LAWA s internal control over financial reporting and compliance. Los Angeles, California November 5, LA/Ontario International Airport FY 2015 Annual Financial Report

29 LA/Ontario International Airport FY 2015 Annual Financial Report 3

30 Management s Discussion and Analysis

31 Los Angeles World Airports (Department of Airports of the City of Los Angeles, California) LA/Ontario International Airport Management s Discussion and Analysis (Unaudited) June 30, 2015 and 2014 Los Angeles World Airports (LAWA) is an independent, fiscally self-sufficient department of the City of Los Angeles, California (City). LAWA is an enterprise fund that owns and operates Los Angeles International Airport (LAX), LA/Ontario International Airport (ONT), and Van Nuys Airport (VNY). LAWA owns approximately 17,750 acres of land located east of USAF Plant 42 in the City of Palmdale. LAWA retains the rights for future development of the Palmdale property. The management of LAWA presents the following narrative overview of ONT s financial activities for the fiscal years ended June 30, 2015 and This discussion and analysis should be read in conjunction with ONT s financial statements that begin on page 21. Using This Financial Report ONT s financial report consists of this management s discussion and analysis (MD&A), and the financial statements that follow after the MD&A. The financial statements include: The Statements of Net Position present information on all of ONT s assets, deferred outflows of resources, liabilities, and deferred inflows of resources at June 30, 2015 and The difference between (a) assets and deferred outflows of resources, and (b) liabilities and deferred inflows of resources was reported as net position. Over time, increases and decreases in net position may serve as a useful indicator about whether ONT s financial position is improving or deteriorating. The Statements of Revenues, Expenses and Changes in Net Position present the results of ONT s operations and information showing the change in net position for the fiscal years ended June 30, 2015 and These statements can be useful indicators of how ONT recovered its costs through rates and charges. All changes in net position were reported when the underlying events occurred, regardless of the timing of the related cash flows. Thus, revenues and expenses were recorded and reported in these statements for some items that will result in cash flows in future periods. The Statements of Cash Flows relate to the inflows and outflows of cash and cash equivalents resulting from operating, noncapital financing, capital and related financing, and investing activities. Consequently, only transactions that affect ONT s cash and cash equivalents accounts were recorded in these statements. At the end of the statements, a reconciliation is provided to assist in understanding the difference between operating income and cash flows from operating activities. The Notes to the Financial Statements present information that is not displayed on the face of the financial statements. Such information is essential to a full understanding of ONT s financial activities. LA/Ontario International Airport FY 2015 Annual Financial Report 3

32 Management s Discussion and Analysis (Unaudited) June 30, 2015 and 2014 (continued) Passenger and Other Traffic Activity Highlights The following table presents a summary of passenger and other traffic for the last three fiscal years: % Change FY 2015 FY 2014 FY 2013 FY 2015 FY 2014 Total passengers 4,165,442 4,005,540 4,148, % -3.4% Domestic passengers 4,048,118 3,932,996 4,095, % -4.0% International passengers 117,324 72,544 53, % 36.1% Departing passengers 2,085,482 2,002,759 2,076, % -3.5% Arriving passengers 2,079,960 2,002,781 2,072, % -3.3% Passenger flight operations Departures 20,884 21,336 22, % -3.1% Arrivals 20,920 21,443 22, % -2.7% Landing weight (thousand lbs) 4,691,442 4,675,640 4,901, % -4.6% Air cargo (tons) Mail 20,962 15,033 18, % -17.8% Freight 462, , , % 2.9% Note: Prior years data may change because of the updated available information, however, in order to remain comparable and consistent with the published data, the passenger and other traffic numbers for prior fiscal years are not changed. Passenger Traffic The following chart presents the top five airlines, by number of passengers, for fiscal year 2015 and the comparative passengers for fiscal years 2014 and FY 2015 Top Five Carriers and Percentage of Market Share (passengers in millions) FY 2015 FY 2014 FY % Southwest Airlines 10.2% US Airways 9.8% American Airlines 8.0% Alaska Airlines 7.9% United Airlines (1) (1) Skywest activity was added into United Airlines effective FY2013 and Continental Airlines merged into United Airlines in early LA/Ontario International Airport FY 2015 Annual Financial Report

33 Passenger Traffic, Fiscal Year 2015 Passenger traffic at ONT increased by 4.0% in fiscal year 2015 as compared to fiscal year Of the 4.2 million passengers, domestic passengers accounted for 97.2%, while international passengers accounted for 2.8%. International passengers increased by 61.7% in fiscal year 2015 as compared to fiscal year Southwest Airlines ferried the largest number of passengers at 2.4 million with a 3.3% increase in passenger traffic. Passenger Traffic, Fiscal Year 2014 Passenger traffic showed decline at a slower pace than the prior year. In fiscal year 2014, there were 4.0 million passengers compared to 4.1 million in fiscal year 2013, a 3.4% decrease. Of the 4.0 million passengers, domestic passengers accounted for 98.2%, while international passengers accounted for 1.8%. International passengers increased by 36.1% in fiscal year 2014 as compared to fiscal year Southwest Airlines ferried the largest number of passengers at 2.3 million, which was at a similar passenger level to fiscal year Flight Operations, Fiscal Year 2015 Departures and arrivals at ONT had a decrease of 975 flights or 2.3% during fiscal year 2015 when compared to fiscal year Revenue landing pounds were up 0.3%. United Parcel Service and Southwest Airlines were the top two carriers in terms of landing pounds. Together, these two airlines contributed 66.7% of the total revenue pounds at ONT. Flight Operations, Fiscal Year 2014 Departures and arrivals had a decrease of 1,281 flights or 2.9% during fiscal year 2014 when compared to fiscal year Revenue landing pounds were down 4.6%. United Parcel Service and Southwest Airlines were the top two carriers in terms of landing pounds. Together, these two airlines contributed 66.22% of the total revenue pounds at ONT. Air Cargo Operations, Fiscal Year 2015 Mail and freight cargo at ONT had an increase of 4.1% in fiscal year 2015 as compared to fiscal year Mail was up 5,929 tons and freight was up 13,017 tons. United Parcel Service was the top mail and freight carrier accounting for 72.5% of total freight cargo, and 91.9% of total mail cargo. Air Cargo Operations, Fiscal Year 2014 Mail and freight cargo had an increase of 2.0% in fiscal year 2014 as compared to fiscal year Mail was down 3,264 tons while freight was up 12,581 tons. United Parcel Service was the top mail and freight carrier accounting for 71.2% of total cargo. LA/Ontario International Airport FY 2015 Annual Financial Report 5

34 Management s Discussion and Analysis (Unaudited) June 30, 2015 and 2014 (continued) Overview of ONT s Financial Statements Financial Highlights, Fiscal Year 2015 ONT s assets exceeded liabilities at June 30, 2015 by $333.1 million. Bonded debt at the close of the fiscal year was $61.3 million. Operating revenue totaled $56.9 million. Operating expenses (including depreciation and amortization of $19.0 million) totaled $71.6 million. Net non-operating revenue was $7.0 million. ONT s proportionate share of net pension liability (NPL) for the retirement benefits, based on the ratio of ONT s contributions to the City s retirement plan s total contributions, was $38.0 million as of measurement date June 30, 2014, and reporting date June 30, NPL, the difference between the total pension liability (TPL) and the retirement plan s net position, is an important measure required by Governmental Accounting Standards Board (GASB) Statements No and 71 2, to disclose in the financial statements. (See Note 11 of the notes to the financial statements.) The data for prior year, fiscal year 2014, was not restated because all of the information available to restate prior year amounts was not readily available. Net position decreased by $43.7 million (including restatement of net position of $(38.7) million as a result of the implementation of GASB Statements No. 68 and 71). Financial Highlights, Fiscal Year 2014 ONT s assets exceeded liabilities at June 30, 2014 by $376.8 million. Bonded debt at the close of the fiscal year was $65.8 million. Operating revenue totaled $56.7 million. Operating expenses (including depreciation and amortization of $20.0 million) totaled $74.4 million. Net non-operating revenue was $6.7 million. Net position decreased by $10.7 million. 1 GASB Statement No. 68, Accounting and Financial Reporting for Pensions an Amendment of GASB Statement No. 27, issued in June GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date an Amendment of GASB Statement No. 68, issued in November LA/Ontario International Airport FY 2015 Annual Financial Report

35 Net Position Summary A condensed net position summary for fiscal years 2015, 2014, and 2013 is presented below: Condensed Net Position (amounts in thousands) Assets FY 2015 FY 2014 increase increase FY 2015 FY 2014 FY 2013 (decrease) (decrease) Unrestricted current assets $ 67,843 $ 80,752 $ 80,289 $ (12,909) $ 463 Restricted current assets 76,263 68,444 67,169 7,819 1,275 Capital assets, net 301, , ,856 (16,032) (17,006) Other noncurrent assets 6,843 6,843 6, Total assets 452, , ,157 (21,122) (15,268) Deferred outflows of resources Deferred charges on debt refunding 1,744 1,905 2,065 (161) (160) Changes of assumptions related to pension 5, , Contribution after measurement date related to pension 3, , Total deferred outflows of resources 10,529 1,905 2,065 8,624 (160) Liabilities Current liabilities payable from unrestricted assets 12,865 24,410 24,913 (11,545) (503) Current liabilities payable from restricted assets 5,862 4,882 5, (135) Noncurrent liabilities 64,271 69,721 73,778 (5,450) (4,057) Net pension liability 37, , Total liabilities 120,965 99, ,708 (16,015) (4,695) Deferred inflows of resources Differences between expected and actual experience related to pension 1, , Differences between projected and actual investment earnings related to pension 6, , Changes in proportion and differences between employer contributions and proportionate share of contributions related to pension 1, , Total deferred inflows of resources 9, , Net Position Net investment in capital assets 242, , ,254 (11,722) (13,297) Restricted for debt service 8,404 8,906 8,875 (502) 31 Restricted for capital projects 58,534 50,810 47,675 7,724 3,135 Restricted for operations and maintenance reserve 14,147 14,314 15,891 (167) (1,577) Restricted for federally forfeited property and protested funds Unrestricted 9,527 48,569 47,596 (39,042) 973 Total net position $ 333,075 $ 376,781 $ 387,514 $ (43,706) $ (10,733) LA/Ontario International Airport FY 2015 Annual Financial Report 7

36 Management s Discussion and Analysis (Unaudited) June 30, 2015 and 2014 (continued) A condensed summary of ONT s net position, on a proforma basis without the financial impact of GASB Statements No. 68 and No. 71, for fiscal years 2015, 2014, and 2013 is presented below: Proforma Condensed Net Position without the Financial Impact of No GASB Statements No. 68 and No. 71 (amounts in thousands) Assets FY 2015 FY 2014 increase increase FY 2015 FY 2014 FY 2013 (decrease) (decrease) Unrestricted current assets $ 67,843 $ 80,752 $ 80,289 $ (12,909) $ 463 Restricted current assets 76,263 68,444 67,169 7,819 1,275 Capital assets, net 301, , ,856 (16,032) (17,006) Other noncurrent assets 6,843 6,843 6, Total assets 452, , ,157 (21,122) (15,268) Deferred outflows of resources Deferred charges on debt refunding 1,744 1,905 2,065 (161) (160) Liabilities Current liabilities payable from unrestricted assets 12,865 24,410 24,913 (11,545) (503) Current liabilities payable from restricted assets 5,862 4,882 5, (135) Noncurrent liabilities 64,271 69,721 73,778 (5,450) (4,057) Total liabilities 82,998 99, ,708 (16,015) (4,695) Net Position Net investment in capital assets 242, , ,254 (11,722) (13,297) Restricted for debt service 8,404 8,906 8,875 (502) 31 Restricted for capital projects 58,534 50,810 47,675 7,724 3,135 Restricted for operations and maintenance reserve 14,147 14,314 15,891 (167) (1,577) Restricted for federally forfeited property and protested funds Unrestricted 47,965 48,569 47,596 (604) 973 Total net position $ 371,513 $ 376,781 $ 387,514 $ (5,268) $ (10,733) 8 LA/Ontario International Airport FY 2015 Annual Financial Report

37 Net Position, Fiscal Year 2015 As noted earlier, net position may serve as a useful indicator of ONT s financial position. At the close of fiscal years 2015 and 2014, ONT s assets exceeded liabilities by $333.1 million and $376.8 million, respectively, representing a decrease of $43.7 million, or 11.6%. The decrease in net position is a result of LAWA s adoption of the provisions of GASB Statements No. 68 and No. 71. The largest portion of ONT s net position ($242.2 million or 72.7%) reflects its investment in capital assets (e.g. land, air easements, buildings, improvements, equipment and vehicles) less depreciation and any related outstanding debt used to acquire those assets. An additional portion of ONT s net position ($81.3 million or 24.4%) represents resources that are subject to various restrictions on how they may be used. The unrestricted net position of $9.5 million or 2.9% reflects the recognition of the reduction of net position due to GASB Statements No. 68 and 71 as stated above. As reflected in the Proforma Condensed Net Position, without the adoption of GASB Statements No. 68 and 71, the unrestricted net position would be $48.0 million. Unrestricted current assets consist primarily of cash and pooled investments (including reinvested cash collateral in 2015) held in the City Treasury. Unrestricted current assets was $67.8 million and $80.8 million at June 30, 2015 and 2014, respectively. Restricted current assets include cash and investments (including reinvested cash collateral in 2015) held in the City Treasury for capital projects funded by passenger facility charges (PFCs) and customer facility charges (CFCs). Also included are bond proceeds to be used for capital expenditures as well as bond debt service funds held by fiscal agents. PFCs and CFCs capital expenditures were less than collections and interest earnings that resulted to a net increase of approximately $7.5 million in fiscal year Capital assets decreased by 5.0% mainly due to depreciation charges during the year that totaled $19.0 million. Rates and charges billed to air carriers are initially set at the beginning of the fiscal year based on budgeted revenues and expenditures. The reconciliation between the actual and budgeted amounts that occurred at the end of the fiscal year 2015 resulted in an overcharge of $4.0 million versus an undercharge of $0.6 million in The overcharge was recognized as part of the other current liabilities while the undercharge was recognized as part of current assets. The City resumed its securities lending program in December 2012 and ONT s allocated share of the cash collateral was $1.0 million, which was reported as a component of current liabilities. The City s securities lending program is discussed in Note 3 of the notes to the financial statements. The increase in noncurrent liabilities was mainly due to the recognition of the proportionate shares of LACERS net pension liability of $38.0 million during fiscal year 2015 offset by the $4.7 million scheduled maturities of bonded debt. In addition to the net pension liability, ONT has also recognized the proportionate share of deferred outflows of resources for changes of assumptions related to pension of $5.5 million, deferred outflows of resources for contribution after measurement date related to pension of $3.3 million, deferred inflows of resources for differences between projected and actual investment earnings related to pension of $6.9 million, deferred inflows of resources for changes in proportion and differences between employer contributions and proportionate share of contributions related to pension of $1.2 million, and deferred inflows of resources for differences between expected and actual actuarial experience related to pension of $1.1 million. As a result, the net financial impact of the implementation of GASB Statements No. 68 and 71 is decrease in the net position by $38.4 million. Implementation of GASB Statements No. 68 and 71 is solely for financial reporting purpose, and it does not represent an immediate funding requirement. Accordingly, without the recognition of the decrease of net position due to GASB Statements No. 68 and 71, ONT s net position, would be $371.5 million. LA/Ontario International Airport FY 2015 Annual Financial Report 9

38 Management s Discussion and Analysis (Unaudited) June 30, 2015 and 2014 (continued) Net Position, Fiscal Year 2014 As noted earlier, net position may serve as a useful indicator of ONT s financial position. At the close of fiscal years 2014 and 2013, ONT s assets exceeded liabilities by $376.8 million and $387.5 million, respectively, representing a decrease of $10.7 million, or 2.8%. The largest portion of ONT s net position ($254.0 million or 67.4%) reflects its investment in capital assets (e.g. land, air easements, buildings, improvements, equipment and vehicles) less depreciation and any related outstanding debt used to acquire those assets. An additional portion of ONT s net position ($74.3 million or 19.7%) represents resources that are subject to various restrictions on how they may be used. The remaining balance of $48.6 million (12.9%) may be used to meet ONT s ongoing obligations. Unrestricted current assets consist primarily of cash and pooled investments (including reinvested cash collateral in 2014) held in the City Treasury. Unrestricted current assets was $80.8 million and $80.3 million at June 30, 2014 and 2013, respectively. Restricted current assets include cash and investments (including reinvested cash collateral in 2014) held in the City Treasury for capital projects funded by PFCs and CFCs. Also included are bond proceeds to be used for capital expenditures as well as bond debt service funds held by fiscal agents. PFCs and CFCs capital expenditures were less than collections and interest earnings that resulted to a net increase of approximately $2.8 million in fiscal year Capital assets decreased by 5.1% mainly due to depreciation charges during the year that totaled $20.0 million. Rates and charges billed to air carriers are initially set at the beginning of the fiscal year based on budgeted revenues and expenditures. The reconciliation between the actual and budgeted amounts that occurred at the end of the fiscal year resulted in an undercharge of $0.6 million and $0.1 million for fiscal year 2014 and 2013, respectively, that were recognized as part of current assets. The City resumed its securities lending program in December 2012 and ONT s allocated share of the cash collateral was $0.2 million, which was reported as a component of current liabilities. The City s securities lending program is discussed in Note 3 of the notes to the financial statements. The decrease in noncurrent liabilities of $4.1 million was due substantially to the scheduled maturities of bonded debt. 10 LA/Ontario International Airport FY 2015 Annual Financial Report

39 Changes in Net Position Summary A condensed summary of ONT s changes in net position for fiscal years ended 2015, 2014 and 2013 is presented below: Condensed Changes in Net Position (amounts in thousands) FY 2015 FY 2014 increase increase FY 2015 FY 2014 FY 2013 (decrease) (decrease) Operating revenue $ 56,880 $ 56,659 $ 63,849 $ 221 $ (7,190) Less- Operating expenses 52,617 54,382 61,026 (1,765) (6,644) Operating income before depreciation and amortization 4,263 2,277 2,823 1,986 (546) Less- Depreciation and amortization 18,990 19,975 20,523 (985) (548) Operating loss (14,727) (17,698) (17,700) 2,971 2 Other nonoperating revenue, net 7,035 6,680 6, Federal grants 2, , Changes in net position (5,046) (10,733) (11,253) 5, Net position, beg. of year, as previously reported 376, , ,654 (10,733) (28,140) Adjustment of an amount due to LAX (15,985) -- 15,985 Change in accounting principle (38,660) -- (902) (38,660) 902 Net position, beg. of year, as restated 338, , ,767 (49,393) (11,253) Net position, end of year $ 333,075 $ 376,781 $ 387,514 $ (43,706) $ (10,733) LA/Ontario International Airport FY 2015 Annual Financial Report 11

40 Management s Discussion and Analysis (Unaudited) June 30, 2015 and 2014 (continued) Operating Revenue ONT derives its operating revenue from several airport business activities. The following table presents a summary of these business activities during fiscal years 2015, 2014, and 2013: Summary of Operating Revenue (amounts in thousands) FY 2015 FY 2014 increase increase FY 2015 FY 2014 FY 2013 (decrease) (decrease) Aviation revenue Landing fees $ 12,140 $ 11,774 $ 11,304 $ 366 $ 470 Building rentals 17,346 17,766 23,287 (420) (5,521) Land rentals 2,839 2,653 3, (937) Other aviation revenue (1) (177) Total aviation revenue 32,650 32,519 38, (6,165) Concession revenue 23,535 23,536 24,497 (1) (961) Other operating revenue (64) Total operating revenue $ 56,880 $ 56,659 $ 63,849 $ 221 $ (7,190) Operating Revenue, Fiscal Year 2015 The following chart illustrates the proportion of sources of operating revenue for fiscal years ended June 30, 2015 and Other aviation revenue and other operating revenue were added and labeled other. FY 2015 Landing fees 21.3% FY 2014 Landing fees 20.8% Building rentals 30.5% Building rentals 31.4% Land rentals 5.0% Land rentals 4.7% Concession 41.4% Concession 41.5% Other 1.8% Other 1.6% 12 LA/Ontario International Airport FY 2015 Annual Financial Report

41 For the fiscal year ended June 30, 2015, total operating revenue was $56.9 million, a $0.2 million or 0.4% increase from the prior fiscal year. Aviation revenue increased by $0.1 million, while concession and other operating revenue increased by $0.1 million. As described in the notes to the financial statements (see Note 1i on page 32), landing fees assessed to air carriers at ONT are based on a cost recovery methodology. Rates are set using budgeted expenses and estimates of landed weight. The fees are reconciled at the end of the fiscal year using actual expenses and actual landed weight, with differences credited or billed to the airlines accordingly. Terminal rental rates calculated for ONT follow a residual fee methodology. Rates are set initially during the fiscal year based on budgeted operating revenue and expenses. Reconciliation between actual revenue and expenses and amounts estimated in the initial calculation result in a fiscal year-end adjustment. The resulting net overcharges or undercharges are recorded as a reduction or addition to unbilled receivables. The residual fee methodologies used in determining fees and charges decreased the landing rate by 4.1% and decreased the terminal rental rate by 19.0%. Overall, landing fees increased by $0.4 million, or 3.1% in fiscal year 2015, and building rentals decreased by $0.4 million, or 2.4%. Total ONT concession revenue remained flat in fiscal year 2015 and In-terminal concession revenue, include rentals collected from food and beverage concessionaires; retail merchants (gifts, news, and novelty items); and concessionaires for advertising, telecommunications, automated teller machines, and luggage cart rental, was down $0.2 million mainly due to the lower advertising revenue. Off-terminal concession revenue, up $0.2 million, is derived from auto parking, rent-a-car services, and fees collected from bus, limousine, and taxi services. The increase was mainly due to higher auto parking revenue resulting from the increase in passenger traffic. Comparative concession revenue by type for fiscal years 2015 and 2014 are presented in the following chart (amounts in millions). FY 2015 FY 2014 $13.6 $13.5 $7.1 $7.1 $0.7 $0.7 $1.0 $0.9 $0.6 $0.8 $0.2 $0.3 $0.3 $0.2 Food and beverage Gifts and news Advertising Other in-terminal Auto parking Rent-a-car Other offterminal LA/Ontario International Airport FY 2015 Annual Financial Report 13

42 Management s Discussion and Analysis (Unaudited) June 30, 2015 and 2014 (continued) Operating Revenue, Fiscal Year 2014 The following chart illustrates the proportion of sources of operating revenue for fiscal years ended June 30, 2014 and Other aviation revenue and other operating revenue were added and labeled other. FY 2014 Landing fees 20.8% FY 2013 Landing fees 17.7% Building rentals 31.4% Building rentals 36.5% Land rentals 4.7% Land rentals 5.6% Concession 41.5% Concession 38.4% Other 1.6% Other 1.8% For the fiscal year ended June 30, 2014, total operating revenue was $56.7 million, a $7.2 million or 11.3% decrease from the prior fiscal year. Aviation revenue decreased by $6.2 million, while concession and other operating revenue decreased by $1.0 million. As described in the notes to the financial statements (see Note 1i on page 32), landing fees assessed to air carriers at ONT are based on a cost recovery methodology. Rates are set using budgeted expenses and estimates of landed weight. The fees are reconciled at the end of the fiscal year using actual expenses and actual landed weight, with differences credited or billed to the airlines accordingly. Terminal rental rates calculated for ONT follow a residual fee methodology. Rates are set initially during the fiscal year based on budgeted operating revenue and expenses. Reconciliation between actual revenue and expenses and amounts estimated in the initial calculation result in a fiscal year-end adjustment. The resulting net overcharges or undercharges are recorded as a reduction or addition to unbilled receivables. The residual fee methodologies used in determining fees and charges increased the landing rate by 10.1% and decreased the terminal rental rate by 23.6%. As a result of the increase in landing rate, landing fees were up by $0.5 million, or 4.2% in fiscal year Building rentals decreased by $5.5 million, or 23.7%, primarily due to decreases in operating expenses. The continuing decline in concession revenue is reflective of the slowing business activities at the airport. The lingering effects of weakened activities, especially in areas primarily served by the airport, have contributed to the depressed business at the airport. In-terminal concession revenue, down $1.2 million, include rentals collected from food and beverage concessionaires; retail merchants (gifts, news, and novelty items); and concessionaires for advertising, telecommunications, automated teller machines, and luggage cart rental. Offterminal concession revenue, up $0.2 million, is derived from auto parking, rent-a-car services, and fees collected from bus, limousine, and taxi services. 14 LA/Ontario International Airport FY 2015 Annual Financial Report

43 Comparative concession revenue by type for fiscal years 2014 and 2013 are presented in the following chart (amounts in millions). FY 2014 FY 2013 $13.5 $13.5 $7.1 $6.8 $1.3 $0.7 $0.9 $1.1 $0.8 $1.1 $0.3 $0.4 $0.2 $0.3 Food and beverage Gifts and news Advertising Other in-terminal Auto parking Rent-a-car Other offterminal Operating Expenses The following table presents a summary of ONT s operating expenses for the fiscal years ended June 30, 2015, 2014, and Summary of Operating Expenses (amounts in thousands) FY 2015 FY 2014 increase increase FY 2015 FY 2014 FY 2013 (decrease) (decrease) Salaries and benefits $ 25,701 $ 25,735 $ 28,128 $ (34) $ (2,393) Contractual services 11,217 12,780 16,115 (1,563) (3,335) Materials and supplies 3,211 3,347 3,556 (136) (209) Utilities 4,254 4,170 4, Other operating expenses 1,302 1,190 1, (43) Allocated administrative charges 6,932 7,160 7,907 (228) (747) Operating expenses before depreciation 52,617 54,382 61,026 (1,765) (6,644) Depreciation 18,990 19,975 20,523 (985) (548) Total operating expenses $ 71,607 $ 74,357 $ 81,549 $ (2,750) $ (7,192) LA/Ontario International Airport FY 2015 Annual Financial Report 15

44 Management s Discussion and Analysis (Unaudited) June 30, 2015 and 2014 (continued) Operating Expenses, Fiscal Year 2015 The following chart illustrates the proportion of categories of operating expenses for fiscal years ended June 30, 2015 and FY 2015 Salaries and benefits 35.9% FY 2014 Salaries and benefits 34.6% Contractual services 15.7% Contractual services 17.2% Materials and supplies 4.5% Materials and supplies 4.5% Utilities 5.9% Utilities 5.6% Depreciation 26.5% Depreciation 26.9% Allocated charges 9.7% Allocated charges 9.6% Other 1.8% Other 1.6% Management continued to take steps to reduce overall cost of operating the ONT airport. The redeployment of certain employees to LAX, combined with other efficiencies, resulted in 3.2% reduction in total operating expenses before depreciation comparing with fiscal year Operating Expenses, Fiscal Year 2014 The following chart illustrates the proportion of categories of operating expenses for fiscal years ended June 30, 2014 and FY 2014 Salaries and benefits 34.6% FY 2013 Salaries and benefits 34.5% Contractual services 17.2% Contractual services 19.8% Materials and supplies 4.5% Materials and supplies 4.3% Utilities 5.6% Utilities 5.0% Depreciation 26.9% Depreciation 25.2% Allocated charges 9.6% Allocated charges 9.7% Other 1.6% Other 1.5% 16 LA/Ontario International Airport FY 2015 Annual Financial Report

45 In response to reduced passenger traffic, management has taken steps to reduce overall cost of operating the airport. The redeployment of certain employees to LAX, combined with other efficiencies, resulted in 10.9% reduction in total operating expenses before depreciation comparing with fiscal year Non-operating Transactions Non-operating transactions are activities that do not result from providing services and producing and delivering goods in connection with ONT s ongoing operations. The following table presents a summary of these activities during fiscal years 2015, 2014, and Summary of Non-operating Transactions (amounts in thousands) increase increase FY 2015 FY 2014 FY 2013 (decrease) (decrease) Nonoperating revenue Passenger facility charges $ 3,611 $ 3,471 $ 5,902 $ 140 $ (2,431) Customer facility charges 3,838 3,670 3, Interest income 1,793 1,930 2,363 (137) (433) Net change in fair value of investments (53) 141 (1,971) (194) 2,112 Other nonoperating revenue (222) 748 $ 9,746 $ 9,991 $ 9,926 $ (245) $ 65 Nonoperating expenses Interest expense $ 2,711 $ 3,311 $ 3,479 $ (600) $ (168) Federal capital grants $ 2,646 $ 285 $ -- $ 2,361 $ 285 Non-operating Transactions, Fiscal Year 2015 The increase in passenger traffic caused the slight increase in PFCs and CFCs revenue. PFCs is a fee imposed on enplaning passengers by airports to finance eligible projects approved by the Federal Aviation Administration (FAA). The increase is offset by the slight decrease in interest income, the downward year-end adjustment to the fair value of investment securities, and the lower other nonoperating revenue. Operating grants from the Transportation Security Administration (TSA) related to certain safety programs were lower during fiscal year 2015 that decreased the other non-operating revenue. Non-operating Transactions, Fiscal Year 2014 Effective January 1, 2013, the PFC rate was reduced to $2.00 from $4.50 per enplaned passenger. This reduction along with the decline in passenger traffic caused the decline in this non-operating revenue category. PFCs is a fee imposed on enplaning passengers by airports to finance eligible projects approved by the FAA. Operating grants from the TSA related to certain safety programs were higher during fiscal year 2014 that increased the other non-operating revenue. LA/Ontario International Airport FY 2015 Annual Financial Report 17

46 Management s Discussion and Analysis (Unaudited) June 30, 2015 and 2014 (continued) Long-Term Debt As of June 30, 2015, ONT s outstanding bonded debt was $59.6 million. The scheduled maturities during the year were $3.9 million. As of June 30, 2014, ONT s outstanding bonded debt was $63.4 million. The scheduled maturities during the year were $3.7 million. As of June 30, 2015 and 2014, ONT had $7.0 million each of investments held by a fiscal agent that are pledged for the payment or security of the outstanding bonds. As of June 30, 2015 and 2014, the ratings of ONT s outstanding bonds by Standard & Poor s Rating Services, Moody s Investors Service, and Fitch Ratings were A-, Baa1 and A-, respectively. Additional information regarding ONT s bonded debt can be found in Note 5 of the notes to the financial statements beginning on page 42. Outstanding principal, plus scheduled interest as of June 30, 2015, is scheduled to mature as shown in the following chart (amounts in millions). $8.0 $7.0 $6.0 $5.0 $4.0 Interest Principal $3.0 $2.0 $ LA/Ontario International Airport FY 2015 Annual Financial Report

47 Capital Assets ONT s investment in capital assets, net of accumulated depreciation, as of June 30, 2015 and 2014 were $301.8 million and $317.9 million, respectively. This investment, which accounts for 66.7% and 67.1% of ONT s total assets as of June 30, 2015 and 2014, respectively, includes land, air easements, buildings, improvements, equipment and vehicles, and construction work in progress. There was no significant capitalization in fiscal years 2015 and Commitments for capital expenditures at June 30, 2015 were $0.1 million for terminal and runways improvements. ONT s policy affecting capital assets can be found in Note 1(f) of the notes to the financial statements on page 31. Additional information can be found in Note 4 on pages Landing Fees, Fiscal Year 2016 The airline landing fees for fiscal year 2016, which became effective as of July 1, 2015 are as follows: Signatory airlines Non-signatory airlines $ $ For each landing of aircraft having a maximum gross landing weight of 12,500 pounds or less For each landing of aircraft having a maximum gross landing weight of more than 12,500 pounds up to and including 25,000 pounds Per 1,000 pounds of maximum gross landing weight for each landing of aircraft having a maximum gross landing weight of more than 25,000 pounds Landing fee rates were based on budgeted operating expenses and revenues. Reconciliation between actual revenues and expenses and amounts estimated in the initial calculation result in a fiscal year-end adjustment. The resulting net overcharges or undercharges are recorded as a reduction or addition to unbilled receivables. Request for Information This report is designed to provide a general overview of the LA/Ontario International Airport s finances. Questions concerning any of the information provided in this report or requests for additional information should be addressed to Ryan P. Yakubik, Chief Financial Officer, Los Angeles World Airports, 1 World Way, Los Angeles, CA LA/Ontario International Airport FY 2015 Annual Financial Report 19

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50 Financial Statements

51 Los Angeles World Airports (Department of Airports of the City of Los Angeles) LA/Ontario International Airport Statements of Net Position June 30, 2015 and 2014 (amounts in thousands) ASSETS Current Assets Unrestricted current assets Cash and pooled investments held in City Treasury $ 67,203 $ 79,430 Accounts receivable, net of allowance for uncollectible accounts: $0; $ Unbilled receivables Accrued interest receivable Grants receivable Prepaid expenses Inventories Total unrestricted current assets 67,843 80,752 Restricted current assets Cash and pooled investments held in City Treasury 73,824 66,074 Investments with fiscal agents Accrued interest receivable Passenger facility charges receivable 1,741 1,757 Customer facility charges receivable Total restricted current assets 76,263 68,444 Total current assets 144, ,196 Noncurrent Assets Capital assets Not depreciated 33,040 30,266 Depreciated, net 268, ,584 Total capital assets 301, ,850 Restricted investments with fiscal agent 6,843 6,843 Total noncurrent assets 308, ,693 TOTAL ASSETS 452, ,889 DEFERRED OUTFLOWS OF RESOURCES Deferred charges on debt refunding 1,744 1,905 Changes of assumptions related to pension 5, Contribution after measurement date related to pension 3, TOTAL DEFERRED OUTFLOWS OF RESOURCES 10,529 1,905 LA/Ontario International Airport FY 2015 Annual Financial Report 21

52 Statements of Net Position (continued) June 30, 2015 and 2014 (amounts in thousands) LIABILITIES Current Liabilities Current liabilities payable from unrestricted assets Contracts and accounts payable $ 5,265 $ 5,237 Accrued salaries Accrued employee benefits Estimated claims payable Due to other agencies -- 15,985 Obligations under securities lending transactions Other current liabilities 5,228 1,346 Total current liabilities payable from unrestricted assets 12,865 24,410 Current liabilities payable from restricted assets Contracts and accounts payable Current maturities of bonded debt 4,070 3,850 Accrued interest payable Obligations under securities lending transactions Other current liabilities Total current liabilities payable from restricted assets 5,862 4,882 Total current liabilities 18,727 29,292 Noncurrent Liabilities Bonded debt, net of current portion 57,257 61,948 Accrued employee benefits, net of current portion 3,242 3,426 Estimated claims payable, net of current portion 3,772 4,347 Net pension liability 37, Total noncurrent liabilities 102,238 69,721 TOTAL LIABILITIES 120,965 99,013 DEFERRED INFLOWS OF RESOURCES Differences between expected and actual experience related to pension 1, Differences between projected and actual investment earnings related to pension 6, Changes in proportion and differences between employer contributions and proportionate share of contributions related to pension 1, TOTAL DEFERRED INFLOWS OF RESOURCES 9, NET POSITION Net investment in capital assets 242, ,957 Restricted for: Debt service 8,404 8,906 Passenger facility charges funded projects 45,294 38,455 Customer facility charges funded projects 3,828 3,176 Capital projects reserve 9,412 9,179 Operations and maintenance reserve 14,147 14,314 Federally forfeited property funds Unrestricted 9,527 48,569 TOTAL NET POSITION $ 333,075 $ 376,781 See accompanying notes to the financial statements. 22 LA/Ontario International Airport FY 2015 Annual Financial Report

53 Los Angeles World Airports (Department of Airports of the City of Los Angeles) LA/Ontario International Airport Statements of Revenues, Expenses and Changes in Net Position For the Fiscal Years Ended June 30, 2015 and 2014 (amounts in thousands) OPERATING REVENUE Aviation revenue Landing fees $ 12,140 $ 11,774 Building rentals 17,346 17,766 Land rentals 2,839 2,653 Other aviation revenue Total aviation revenue 32,650 32,519 Concession revenue 23,535 23,536 Other operating revenue Total operating revenue 56,880 56,659 OPERATING EXPENSES Salaries and benefits 25,701 25,735 Contractual services 11,217 12,780 Materials and supplies 3,211 3,347 Utilities 4,254 4,170 Other operating expenses 1,302 1,190 Allocated administrative charges 6,932 7,160 Total operating expenses before depreciation and amortization 52,617 54,382 Operating income before depreciation and amortization 4,263 2,277 Depreciation and amortization 18,990 19,975 OPERATING LOSS (14,727) (17,698) NONOPERATING REVENUE (EXPENSES) Passenger facility charges 3,611 3,471 Customer facility charges 3,838 3,670 Interest income 1,793 1,930 Net change in fair value of investments (53) 141 Interest expense (2,711) (3,311) Other nonoperating revenue Total nonoperating revenue, net 7,035 6,680 LOSS BEFORE CAPITAL GRANTS (7,692) (11,018) Federal grants 2, CHANGE IN NET POSITION (5,046) (10,733) NET POSITION, BEGINNING OF YEAR, AS PREVIOUSLY REPORTED 376, ,514 Change in accounting principle (38,660) -- NET POSITION, BEGINNING OF YEAR, AS RESTATED 338, ,514 NET POSITION, END OF YEAR $ 333,075 $ 376,781 See accompanying notes to the financial statements. LA/Ontario International Airport FY 2015 Annual Financial Report 23

54 Los Angeles World Airports (Department of Airports of the City of Los Angeles) LA/Ontario International Airport Statements of Cash Flows For the Fiscal Years Ended June 30, 2015 and 2014 (amounts in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers $ 44,534 $ 56,999 Payments to suppliers (19,810) (22,129) Payments for employee salaries and benefits (26,044) (25,861) Payments for City services (104) -- Inter-agency payments for services, net (6,932) (7,160) Net cash provided by (used for) operating activities (8,356) 1,849 CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES Noncapital grants received CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Principal paid on revenue bonds (3,850) (3,670) Interest paid on revenue bonds (3,195) (3,373) Acquisition and construction of capital assets (2,982) (2,945) Proceeds from passenger facility charges 3,627 3,686 Proceeds from customer facility charges 3,743 3,696 Capital contributed by federal agencies 2, Net cash provided by (used for) capital and related financing activities (11) (2,321) CASH FLOWS FROM INVESTING ACTIVITIES Interest income 1,885 2,034 Net change in fair value of investments (53) 141 Cash collateral received (paid) under securities lending transactions 863 (343) Sales (purchases) of investments 678 (302) Net cash provided by (used for) investing activities 3,373 1,530 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,477) 1,757 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 145, ,922 CASH AND CASH EQUIVALENTS, END OF YEAR $ 141,202 $ 145,679 CASH AND CASH EQUIVALENTS COMPONENTS Cash and pooled investments held in City Treasury- unrestricted $ 67,203 $ 79,430 Cash and pooled investments held in City Treasury- restricted 73,824 66,074 Investments with fiscal agent- restricted Total cash and cash equivalents $ 141,202 $ 145, LA/Ontario International Airport FY 2015 Annual Financial Report

55 RECONCILIATION OF OPERATING LOSS TO NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES Operating loss $ (14,727) $ (17,698) Adjustments to reconcile operating loss to net cash provided by (used for) operating activities Depreciation and amortization 18,990 19,975 Change in provision for uncollectible accounts (16) 7 Other nonoperating expenses, net Changes in operating assets and liabilities and deferred outflows and inflows of resources Accounts receivable Unbilled receivables 609 (476) Prepaid expenses and inventories 27 (104) Contracts and accounts payable 53 (658) Accrued salaries 76 1 Accrued employee benefits (207) (7) Other liabilities (12,959) 482 Net pension liability and related charges in deferred outflows and inflows of resources (222) -- Total adjustments 6,371 19,547 Net cash provided by (used for) operating activities $ (8,356) $ 1,849 See accompanying notes to the financial statements. LA/Ontario International Airport FY 2015 Annual Financial Report 25

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57 Index to the Notes to the Financial Statements The notes to the financial statements include disclosures that are necessary for a better understanding of the accompanying financial statements. An index to the notes follows: Page 1. Reporting Entity and Summary of Significant Accounting Policies New Accounting Standards Cash and Investments Capital Assets Bonded Debt Changes in Long-Term Liabilities Leases and Agreeements Passenger Facility Charges Customer Facility Charges Related Party Transactions Pension and Other Postemployment Benefit Plans Risk Management Commitments, Litigations, and Contingencies...57 LA/Ontario International Airport FY 2015 Annual Financial Report 27

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59 Los Angeles World Airports (Department of Airports of the City of Los Angeles) LA/Ontario International Airport Notes to the Financial Statements June 30, 2015 and Reporting Entity and Summary of Significant Accounting Policies a. Organization and Reporting Entity Los Angeles World Airports (Department of Airports of the City of Los Angeles, California) (LAWA) is an independent, financially self-sufficient department of the City of Los Angeles (the City) established pursuant to Article XXIV, Section 238 of the City Charter. LAWA operates and maintains Los Angeles International Airport (LAX), LA/Ontario International Airport (ONT), and Van Nuys Airport (VNY). In addition, LAWA owns property consisting of approximately 17,750 acres of land in the City of Palmdale and retains the rights for future development of the Palmdale property. LAWA is under the management and control of a seven-member Board of Airport Commissioners (the Board) appointed by the City Mayor and approved by the City Council. Under the City Charter, the Board has the general power to, among other things: (a) acquire, develop, and operate all property, plant, and equipment as it may deem necessary or convenient for the promotion and accommodation of air commerce; (b) borrow money to finance the development of airports owned, operated, or controlled by the City; and (c) fix, regulate, and collect rates and charges for the use of the Airport System. An Executive Director administers LAWA and reports to the Board. The accompanying financial statements present the net position and changes in net position and cash flows of ONT. These financial statements are not intended to present the financial position and changes in financial position of LAWA or the City, or cash flows of LAWA or the City s enterprise funds. b. Basis of Accounting ONT is reported as an enterprise fund and maintains its records on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (GAAP) as promulgated by the Governmental Accounting Standards Board (GASB). Under this method, revenues are recorded when earned and expenses are recorded when the related liability is incurred. Separate funds are used to account for each of the three airports referred to above and the Palmdale property. LA/Ontario International Airport FY 2015 Annual Financial Report 29

60 Notes to the Financial Statements June 30, 2015 and 2014 (continued) c. Cash, Cash Equivalents, and Investments ONT s cash, cash equivalents, and investments and a significant portion of its restricted cash and investments are maintained as part of the City s pool of cash and investments. ONT s portion of the pool is presented on the statements of net position as Cash and Pooled Investments Held in City Treasury. ONT s investments, including its share in the City s investment pool, are stated at fair value based on quoted market prices except for money market investments that have remaining maturities of one year or less at time of purchase, which are reported at amortized cost. Interest earned on such pooled investments is allocated to the participating City funds based on each fund s average daily cash balance during the allocation period. As permitted by the California Government Code, the City engages in securities lending activities. ONT s share of assets and liabilities arising from the reinvested cash collateral has been recognized in the statements of net position. ONT considers its unrestricted and restricted cash and investments held in the City Treasury as demand deposits and therefore these amounts are reported as cash equivalents. ONT has funds that are held by fiscal agents. Investments with maturities of three months or less at the time of purchase are considered cash equivalents. d. Accounts Receivable and Unbilled Receivables ONT recognizes revenue in the period earned. Receivables outstanding beyond 90 days are put into the collection process and then referred after 120 days to LAWA s resident City attorneys for possible write-off. An allowance for uncollectible accounts is set up as a reserve by LAWA policy. This policy requires that 2% of outstanding receivables plus 80% of all bankruptcy accounts and all referrals to City Attorney be reserved as uncollectible through a provisional month-end charge to operating expense. Unbilled receivables balances are the result of revenue accrued for services that exceed $5,000 each, but not yet billed as of year-end. This accrual activity occurs primarily at year-end when services provided in the current fiscal year period might not get processed through the billing system for up to sixty days into the next fiscal year. e. Inventories ONT s inventories consist primarily of general custodial supplies and are recorded at cost on a first-in, first-out basis. 30 LA/Ontario International Airport FY 2015 Annual Financial Report

61 f. Capital Assets All capital assets are carried at cost or at estimated fair value on the date received in the case of properties acquired by donation or by termination of leases, less allowance for accumulated depreciation. Maintenance and repairs are charged to operations in the period incurred. Renewals and betterments are capitalized in the asset accounts. ONT has a capitalization threshold of $5,000 for all capital assets other than internally generated computer software where the threshold is $500,000. Preliminary costs of capital projects incurred prior to the finalization of formal construction contracts are capitalized. In the event the proposed capital projects are abandoned, the associated preliminary costs are charged to expense in the year of abandonment. ONT capitalizes interest costs of bond proceeds used during construction (net of interest earnings on the temporary investment of tax-exempt bond proceeds). There was no capitalized interest in fiscal years 2015 and Depreciation and amortization are computed on a straight-line basis. The estimated useful lives of the major property classifications are as follows: buildings and facilities, 10 to 40 years; airfield and other improvements, 10 to 35 years; equipment, 5 to 20 years; and computer software, 5 to 10 years. No depreciation is provided for construction work in process until construction is completed and/or the asset is placed in service. Also, no depreciation is taken on air easements because they are considered inexhaustible. g. Contracts Payable, Accounts Payable, and Other Liabilities All transactions for goods and services obtained by ONT from City-approved contractors and vendors are processed for payment via its automated payment system. This procedure results in the recognition of expense in the period that an invoice for payment is processed through the system, or when a vendor first provided the goods and/or services. If the goods and/or services were received or if the invoice was received but not yet processed in the system, an accrual is made manually by journal voucher into the general ledger to reflect the liability to the vendor. When ONT makes agreements that require customers to make cash deposits, these amounts are then reflected as other current liabilities. h. Operating and Non-operating Revenues and Expenses ONT distinguishes between operating revenues and expenses, and non-operating revenues and expenses. Operating revenues and expenses generally result from providing services, and producing and delivering goods in connection with ONT s principal ongoing operations. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. ONT derives its operating revenues primarily from landing fees, terminal space rental, auto parking, and concessions. ONT s major operating expenses include salaries and employee benefits, fees for contractual services related to security and parking management, and other expenses such as depreciation and amortization, maintenance, insurance, and utilities. LA/Ontario International Airport FY 2015 Annual Financial Report 31

62 Notes to the Financial Statements June 30, 2015 and 2014 (continued) i. Landing Fees and Terminal Rents Landing fees and terminal rental rates are used to determine what fees are to be charged to the airlines for use of airfield and terminal facilities at ONT and landing fees assessed to air carriers are based on cost recovery methodologies. ONT uses a residual method to determine these rates and fees. Under this method, ONT sets the airlines landing fees and terminal rental rates so that those fees provide the revenue needed to offset the difference between ONT s total expenses and the revenues collected from other sources such as concession, parking and other rental revenue. j. Concession Revenue Concession revenues are generated through ONT terminal concessionaires, tenants or airport service providers who pay monthly fees for using or accessing airport facilities to offer their goods and services to the general public and air transportation community. Payments to ONT are typically based on negotiated agreements with these parties to remit amounts based on either a Minimum Annual Guarantee (MAG) or on gross receipts. Amounts recorded to revenue are determined by the type of revenue category set up in the general ledger system and integrated with the monthly accounts receivable billing process. Concession revenue is recorded as it is earned. Some tenant agreements require self-reporting of concession operations and/or sales. The tenants operations report and payment are due to ONT in the month following the activity. The timing of concessionaire reporting and when revenue earned is recorded will determine when accruals are required for each tenant. k. Unearned Revenue Unearned revenue consists of concessionaire rentals and payments received in advance, which will be amortized to revenue on the straight-line basis over the applicable period. l. Accrued Employee Benefits Accrued employee benefits include estimated liability for vacation and sick leaves. ONT employees accumulate annual vacation and sick leaves in varying amounts based on length of service. Vacation and sick leaves are recorded as earned. Upon termination or retirement, employees are paid the cash value of their accumulated leaves. Accrued employee benefits as of June 30, 2015 and 2014 are as follows (amounts in thousands): Type of benefit Accrued vacation leave $ 1,709 $ 1,901 Accrued sick leave 1,934 1,949 Total $ 3,643 $ 3, LA/Ontario International Airport FY 2015 Annual Financial Report

63 m. Deferred Outflows and Inflows of Resources In addition to assets and liabilities, ONT reports a separate section for deferred outflows of resources and deferred inflows of resources, respectively. Deferred outflows of resources represent a consumption of net position that applies to a future period(s) and won t be recognized as an outflow of resources until then. Deferred inflows of resources represent an acquisition of resources that is applicable to future reporting period(s) that won t be recognized as an inflow of resources until then. ONT reported deferred charges on refunding of $1.7 million and $1.9 million for fiscal years 2015 and 2014, respectively, as a result of the implementation of GASB Statement No. 65, Items Previously Reported as Assets and Liabilities. As a result of the implementation of GASB Statement No. 68, Accounting and Financial Reporting for Pensions an Amendment of GASB Statement No. 27, and GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date an Amendment of GASB Statement No. 68, ONT reported the following deferred outflows and inflows of resources: Deferred outflows of resources for fiscal year 2015: Changes of assumptions related to pension of $5.5 million. Contribution after measurement date related to pension of $3.3 million. Deferred inflows of resources for fiscal year 2015: Differences between projected and actual investment earnings related to pension of $6.9 million Changes in proportion and differences between employer contributions and proportionate share of contributions related to pension of $1.2 million Differences between expected and actual actuarial experience related to pension of $1.1 million. The data for prior year, fiscal year 2014, was not restated because all of the information available to restate prior year amounts was not readily available. n. Federal Grants When a grant agreement is approved and eligible expenditures are incurred, the amount is recorded as a federal grant receivable and as non-operating revenue (operating grants) or capital grant contributions in the statements of revenues, expenses, and changes in net position. o. Bond Premiums and Discounts Bond premiums, discounts, and gains and losses on extinguishment of debt are deferred and amortized over the life of the bonds. Bonds payable is reported net of the applicable bond premium or discount. LA/Ontario International Airport FY 2015 Annual Financial Report 33

64 Notes to the Financial Statements June 30, 2015 and 2014 (continued) p. Net Position The financial statements utilize a net position presentation. Net position is categorized as follows: Net Investment in Capital Assets This category groups all capital assets into one component of net position. Accumulated depreciation and the outstanding balances of debt that are attributable to the acquisition, construction, or improvement of these assets reduce the balance in this category. Restricted Net Position This category presents restricted assets reduced by liabilities and deferred inflows of resources related to those assets. Those assets are restricted due to external restrictions imposed by creditors, grantors, contributors, or laws or regulations of other governments and restrictions imposed by law through constitutional provisions or enabling legislation. At June 30, 2015 and 2014, net position of $49.1 million and $41.6 million, respectively, are restricted by enabling legislation. Unrestricted Net Position This category represents net position of ONT that is not restricted for any project or other purpose. q. Use Restricted/Unrestricted Net Position When an expense is incurred for purposes of which both restricted and unrestricted resources are available, ONT s policy is to apply restricted resources first. r. Use of Estimates The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts in the financial statements and accompanying notes. Actual results could differ from the estimates. s. Restatement of Net Position The net position at July 1, 2014 was restated by $38.7 million to adjust for the change in accounting principle as a result of the implementation of GASB Statements No. 68 and NET POSITION, BEGINNING OF YEAR, AS PREVIOUSLY REPORTED $ 376,781 Change in accounting principle as a result of implementation of GASB Statement No. 68 (38,660) NET POSITION, BEGINNING OF YEAR, AS RESTATED $ 338,121 The beginning of the year net position for fiscal year 2014 was not restated because all of the information available to restate prior year amounts was not readily available. 34 LA/Ontario International Airport FY 2015 Annual Financial Report

65 2. New Accounting Standards Implementation of the following GASB statements is effective fiscal year Issued in June 2012, GASB Statement No. 68, Accounting and Financial Reporting for Pensions an Amendment of GASB Statement No. 27, replaces the requirements of previously issued statements as they relate to governments that provide pensions through pension plans administered by trusts or similar arrangements that meet certain criteria. This statement requires governments providing defined benefit pensions to recognize their long-term obligation for pension benefits as a liability. Governments will report in their financial statements a net pension liability that represents the difference between the total pension liability and the pension plan s fiduciary net position. This statement also enhances accountability and transparency through revised and new note disclosures and required supplementary information, including descriptive information about the types of benefits available, how to determine the amount of pension plan contributions, and assumptions and methods used in calculating the pension liability. This statement requires ONT to record a liability and expense equal to their proportionate share of the collective net pension liability and expense of the City s single-employer defined benefit pension plan. Issued in November 2013, GASB Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date an Amendment of GASB Statement No. 68, amends GASB Statement No. 68 to require that, at transition, a government recognize a beginning deferred outflow of resources for its pension contributions, if any, made subsequent to the measurement date of the beginning net pension liability. GASB Statement No. 68, as amended, continues to require that beginning balances for other deferred outflows of resources and deferred inflows of resources related to pensions be reported at transition only if it is practical to determine all such amounts. The provisions of this statement are required to be applied simultaneously with the provisions of GASB Statement No. 68. As of July 1, 2014, ONT adopted the provisions of GASB Statements No. 68 and No. 71 and restated the beginning net position by $38.7 million to recognize the proportionate shares of net pension liability as of June 30, Additional information can be found in Note 1(s) on page 34. Issued in January 2013, GASB Statement No. 69, Government Combinations and Disposals of Government Operations, establishes accounting and financial reporting standards related to mergers, acquisitions, transfers of operations, and disposal of operations applicable to state and local governmental entities. This statement had no impact on ONT s financial statements for fiscal year ONT will evaluate the potential impacts of this statement on its accounting practices and financial statements if the operations for ONT as stated in Note 13 (e) to the financial statements are changed in the future. The GASB has issued several pronouncements that have effective dates that may impact future presentations. ONT is evaluating the potential impacts of the following GASB statements on its accounting practices and financial statements. Issued in February 2015, GASB Statement No. 72, Fair Value Measurement and Application, addresses accounting and financial reporting issues related to fair value measurements. The definition of fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This statement provides guidance for determining a fair value measurement for financial reporting purposes. This statement also provides guidance for applying fair value to certain investments and disclosures related to all fair value measurements. Implementation of this statement is effective fiscal year LA/Ontario International Airport FY 2015 Annual Financial Report 35

66 Notes to the Financial Statements June 30, 2015 and 2014 (continued) Issued in June 2015, GASB Statement No. 73, Accounting and Financial Reporting for Pensions and Related Assets That Are Not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68, establishes requirements for defined benefit pensions that are not within the scope of GASB Statement No. 68 as well as for the assets accumulated for purposes of providing those pensions. In addition, this statement also clarifies the application of certain provisions of GASB Statement No. 68 with regard to the information that is required to be presented as notes to the 10-year schedules of required supplementary information about investment-related factors that significantly affect trends in the amounts reported. Implementation of this statement is effective fiscal year Issued in June 2015, GASB Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans replaces GASB Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, as amended, and GASB Statement No. 57, OPEB Measurements by Agent Employers and Agent Multiple-Employer Plans. This statement will improve the usefulness of information about postemployment benefits other than pensions (other postemployment benefits or OPEB) included in the general purpose external financial reports of state and local governmental OPEB plans for making decisions and assessing accountability. Implementation of this statement is effective fiscal year Issued in June 2015, GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, addresses accounting and financial reporting for other postemployment benefit (OPEB) that is provided to the employees of state and local governmental employers. This statement establishes standards for recognizing and measuring liabilities, deferred outflows of resources, deferred inflows of resources, and expense. For defined benefit OPEB, this statement identifies the methods and assumptions that are required to be used to project benefit payments, discount projected benefit payments to their actuarial present value, and attribute that present value to periods of employee service. Implementation of this statement is effective fiscal year Issued in June 2015, GASB Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles (GAAP) for State and Local Governments, consists of the sources of accounting principles used to prepare financial statements of state and local governmental entities in conformity with GAAP and the framework for selecting those principles. This statement reduces the GAAP hierarchy to two categories of authoritative GAAP and addresses the use of authoritative and non-authoritative literature in the event that the accounting treatment for a transaction or other event is not specified within a source of authoritative GAAP. Implementation of this statement is effective fiscal year Issued in August 2015, GASB Statement No. 77, Tax Abatement Disclosures, requires disclosure of tax abatement information about a reporting government s own tax abatement agreements and those that are entered into by other governments and that reduce the reporting government s tax revenues. Implementation of this statement is effective fiscal year LA/Ontario International Airport FY 2015 Annual Financial Report

67 3. Cash and Investments a. Pooled Investments Pursuant to the California Government Code and the Los Angeles City Council File No , the City Treasurer provides an Annual Statement of Investment Policy (the Policy) to the City Council. The Policy governs the City s pooled investment practices with the following objectives, in order of priority, safety of capital, liquidity, and rate of return. The Policy addresses soundness of financial institutions in which the Treasurer will deposit funds and types of investment instruments permitted under California law. Each investment transaction and the entire portfolio must comply with the California Government Code and the Policy. Examples of investments permitted by the Policy are obligations of the U.S. Treasury and government agencies, commercial paper notes, negotiable certificates of deposit, guaranteed investment contracts, bankers acceptances, medium-term corporate notes, money market accounts, and the State of California Local Agency Investment Fund (LAIF). ONT maintains a portion of its unrestricted and restricted cash and investments in the City s cash and investment pool (the Pool). As of June 30, 2015 and 2014, ONT s share of the Pool was $141.0 million and $145.5 million, respectively, which represent approximately 2% each year. There are no specific investments belonging to ONT. Included in ONT s portion of the Pool is the allocated investment agreements traded at year-end that were settled in the subsequent fiscal year. ONT s allocated shares for fiscal years 2015 and 2014 were $1.8 million and $1.1 million, respectively, and were reported as other current liabilities in the statement of net position. The City issues a publicly available financial report that includes complete disclosures related to the entire cash and investment pool. The report may be obtained by writing to the City of Los Angeles, Office of the Controller, 200 North Main Street, City Hall East Suite 300, Los Angeles, CA 90012, or by calling (213) b. City of Los Angeles Securities Lending Program The Securities Lending Program (SLP) is permitted and limited under provisions of California Government Code Section The City Council approved the SLP on October 22, 1991 under Council File No , which complies with the California Government Code. The objectives of the SLP in priority order are: safety of loaned securities and prudent investment of cash collateral to enhance revenue from the investment program. The SLP is governed by a separate policy and guidelines, with oversight responsibility of the Investment Advisory Committee. The City s custodial bank acts as the securities lending agent. In the event a counterparty defaults by reason of an act of insolvency, the bank shall take all actions which it deems necessary or appropriate to liquidate permitted investment and collateral in connection with such transaction and shall make a reasonable effort for two business days (Replacement Period) to apply the proceeds thereof to the purchase of securities identical to the loaned securities not returned. If during the Replacement Period the collateral liquidation proceeds are insufficient to replace any of the loaned securities not returned, the bank shall, subject to payment by the City of the amount of any losses on any permitted investments, pay such additional amounts as necessary to make such replacement. LA/Ontario International Airport FY 2015 Annual Financial Report 37

68 Notes to the Financial Statements June 30, 2015 and 2014 (continued) Under the provisions of the SLP, and in accordance with the California Government Code, no more than 20% of the market value of the Pool is available for lending. The City receives cash, U.S. government securities, and federal agency issued securities as collateral on loaned securities. The cash collateral is reinvested in securities permitted under the policy. In accordance with the Code, the securities lending agent marks to market the value of both the collateral and the reinvestments daily. Except for open loans where either party can terminate a lending contract on demand, term loans have a maximum life of 90 days. Earnings from securities lending accrue to the Pool and are allocated on a pro rata basis to all Pool participants. ONT participates in the City s securities lending program through the pooled investment fund. ONT recognizes its proportionate share of the cash collateral received for securities loaned and the related obligation for the general investment pool. The City temporarily suspended its securities lending program in May 2012 and resumed in December At June 30, 2015, ONT s portion of the cash collateral and the related obligation in the City s program was $1.0 million. ONT s portion of the securities purchased from the reinvested cash collateral at June 30, 2015 was $1.0 million. Such securities are stated at fair value and reported under the cash and pooled investments held in City Treasury. ONT s portion of the noncash collateral at June 30, 2015 was $13.3 million. At June 30, 2014, ONT s portion of the cash collateral and the related obligation in the City s program was $0.2 million. ONT s portion of the securities purchased from the reinvested cash collateral at June 30, 2014 was $0.2 million. Such securities are stated at fair value. ONT s portion of the noncash collateral at June 30, 2014 was $5.2 million. During the fiscal years, collateralizations on all loaned securities were within the required 102.0% of market value. The City can sell collateral securities only in the event of borrower default. The lending agent provides indemnification for borrower default. There were no violations of legal or contractual provisions and no borrower or lending agent default losses during the years. There was no credit risk exposure to the City at June 30, 2015 and 2014 because the amounts owed to the borrowers exceeded the amounts borrowed. Loaned securities are held by the City s agents in the City s name and are not subject to custodial credit risk. 38 LA/Ontario International Airport FY 2015 Annual Financial Report

69 c. Investments with Fiscal Agents The investment practices of the fiscal agents that relate to ONT s portfolio are similar as those of the City Treasurer s, and have similar objectives. ONT s investments held by a fiscal agent are pledged for the payment or security of outstanding bonds. These investments have maturities designed to coincide with required bond retirement payments. The breakdown of investments is as follows (amounts in thousands): Description June Money market mutual funds $ 175 $ 175 Collateralized investment contract 6,843 6,843 Total $ 7,018 $ 7,018 Interest Rate Risk. Investments in money market mutual funds have a weighted average maturity of less than one year while the collateralized investment contract matures in more than five years. ONT adopts the City s policy that limits the maturity of investments to five years for U.S. Treasury and government agency securities. The policy allows funds with longer term investments horizons, to be invested in securities that at the time of the investment have a term remaining to maturity in excess of five years, but with a maximum final maturity of thirty years. Credit Risk. The City s policy requires that a mutual fund must receive the highest ranking by not less than two nationally recognized rating agencies. At June 30, 2015 and 2014, the money market mutual funds were rated AAAm by Standard and Poor s, and Aaa by Moody s. The collaterized investment contract is not rated. LA/Ontario International Airport FY 2015 Annual Financial Report 39

70 Notes to the Financial Statements June 30, 2015 and 2014 (continued) 4. Capital Assets ONT had the following activities in capital assets during fiscal year 2015 (amounts in thousands): Balance at Retirements Interagency Balance at June 30, 2014 Additions & disposals transfers June 30, 2015 Capital assets not depreciated Land and land clearance $ 25,789 $ -- $ -- $ -- $ 25,789 Air easements 2, ,502 Construction work in progress 1,975 2, ,749 Total capital assets not depreciated 30,266 2, ,040 Capital assets depreciated Buildings 216, ,015 Improvements 334, (1,699) 332,742 Equipment and vehicles 31, (342) 1,699 32,823 Total capital assets depreciated 581, (342) ,580 Less accumulated depreciation Buildings (88,611) (5,423) (94,034) Improvements (180,149) (11,691) (191,840) Equipment and vehicles (25,394) (1,876) (26,928) Total accumulated depreciation (294,154) (18,990) (312,802) Capital assets depreciated, net 287,584 (18,806) ,778 Total capital assets $ 317,850 $ (16,032) $ -- $ -- $ 301, LA/Ontario International Airport FY 2015 Annual Financial Report

71 ONT had the following activities in capital assets during fiscal year 2014 (amounts in thousands): Balance at Retirements Balance at June 30, 2013 Additions & disposals June 30, 2014 Capital assets not depreciated Land and land clearance $ 25,789 $ -- $ -- $ 25,789 Air easements 2, ,502 Construction work in progress 652 1, ,975 Total capital assets not depreciated 28,943 1, ,266 Capital assets depreciated Buildings 216, ,015 Improvements 333,041 1, ,441 Equipment and vehicles 31, (282) 31,282 Total capital assets depreciated 580,374 1,646 (282) 581,738 Less accumulated depreciation Buildings (83,141) (5,470) -- (88,611) Improvements (166,765) (13,384) -- (180,149) Equipment and vehicles (24,555) (1,121) 282 (25,394) Total accumulated depreciation (274,461) (19,975) 282 (294,154) Capital assets depreciated, net 305,913 (18,329) ,584 Total capital assets $ 334,856 $ (17,006) $ -- $ 317,850 LA/Ontario International Airport FY 2015 Annual Financial Report 41

72 Notes to the Financial Statements June 30, 2015 and 2014 (continued) 5. Bonded Debt Bonds issued by ONT are payable solely from revenues of ONT and are not general obligations of the City. a. Outstanding Debt Outstanding revenue and revenue refunding bonds are due serially in varying annual amounts. Bonds outstanding as of June 30, 2015 and 2014 are as follows (amounts in thousands): Fiscal year of last Issue Interest scheduled Original Outstanding principal Bond issues date rate maturity principal Issue of 2006, Series A 10/18/ % % 2026 $ 83,720 $ 55,305 $ 58,880 Issue of 2006, Series B 10/18/ % % ,435 4,270 4,545 Total principal amount $ 90,155 59,575 63,425 Unamortized premium 1,752 2,373 Net revenue bonds 61,327 65,798 Less- current portion of debt (4,070) (3,850) Net noncurrent debt $ 57,257 $ 61,948 b. Pledged Revenue The bonds are subject to optional and mandatory sinking fund redemption prior to maturity. ONT has agreed to certain covenants with respect to bonded indebtedness. Significant covenants include the requirement that ONT s pledged revenues, as defined in the master senior and subordinate indentures, shall be the security and source of payment for the bonds. The total principal and interest remaining to be paid on the bonds is $79.2 million. Principal and interest paid during fiscal year 2015 and the net pledged revenues, as defined in the master senior and subordinate indentures, were $7.0 million and $10.0 million, respectively. Principal and interest paid during fiscal year 2014 and the net pledged revenues, as defined in the master senior and subordinate indentures, were $7.0 million and $10.1 million, respectively. 42 LA/Ontario International Airport FY 2015 Annual Financial Report

73 c. Principal Maturities and Interest Scheduled annual principal maturities and interest are as follows (amounts in thousands): Fiscal year(s) ending Principal Interest Total 2016 $ 4,070 $ 3,003 $ 7, ,295 2,799 7, ,535 2,582 7, ,790 2,353 7, ,045 2,112 7, ,825 6,444 36, , ,369 Total $ 59,575 $ 19,647 $ 79, Changes in Long-Term Liabilities ONT had the following long-term liabilities activity for the fiscal year ended June 30, 2015 (amounts in thousands): Balance at Balance at Current June 30, 2014 Additions Reduction June 30, 2015 Portion Revenue bonds $ 63,425 $ -- $ (3,850) $ 59,575 $ 4,070 Add unamortized premium 2, (621) 1, Net revenue bonds 65, (4,471) 61,327 4,070 Accrued employee benefits 3, (424) 3, Estimated claims payable 4, (533) 4, Net pension liability -- 37, , Total long-term liabilities $ 74,519 $ 38,184 $ (5,428) $ 107,275 $ 5,037 LA/Ontario International Airport FY 2015 Annual Financial Report 43

74 Notes to the Financial Statements June 30, 2015 and 2014 (continued) ONT had the following long-term liabilities activity for the fiscal year ended June 30, 2014 (amounts in thousands): Balance at Balance at Current June 30, 2013 Additions Reduction June 30, 2014 Portion Revenue bonds $ 67,095 $ -- $ (3,670) $ 63,425 $ 3,850 Add unamortized premium 2, (200) 2, Net revenue bonds 69, (3,870) 65,798 3,850 Accrued employee benefits 3, (424) 3, Estimated claims payable 4, (548) 4, Total long-term liabilities $ 78,420 $ 941 $ (4,842) $ 74,519 $ 4, Leases and Agreements Operating Leases and Agreements As Lessor ONT has entered into numerous rental agreements with concessionaires for food and beverage, gift and news, duty-free, rental car facilities, and advertisements. In general, the agreements provide for cancellation on a 30-day notice by either party; however, they are intended to be long-term in nature with renewal options. Accordingly, these agreements are considered operating leases for purposes of financial reporting. The agreements provide for a concession fee equal to the greater of a minimum annual guarantee (MAG) or a percentage of gross revenues. Certain agreements are subject to escalation of the MAG. For the fiscal years ended June 30, 2015 and 2014, revenues from such agreements were approximately $9.9 million and $10.1 million, respectively. The respective amounts over MAG were $2.4 million and $1.1 million. Minimum future rents under these agreements over the next four years, assuming that current agreements are carried to contractual termination, are as follows (amounts in thousands): Fiscal year ending Amount 2016 $ 7, , , ,060 Total $ 25, LA/Ontario International Airport FY 2015 Annual Financial Report

75 ONT also leases land and terminal facilities to certain airlines and others. These lease agreements are accounted for as operating leases. For the fiscal years ended June 30, 2015 and 2014, revenues from these leases were approximately $20.2 million and $20.4 million, respectively. Future rents under these leases over the next five years, based on existing rates and assuming that current agreements are carried to contractual termination, are as follows (amounts in thousands): Fiscal year ending Amount 2016 $ 22, , , , ,645 Total $ 106,189 The carrying cost and the related accumulated depreciation of property held for operating leases as of June 30, 2015 and 2014 are as follows (amounts in thousands): Buildings and facilities $ 198,158 $ 198,158 Less- Accumulated depreciation (86,225) (81,349) Net 111, ,809 Land 25,789 25,789 Total $ 137,722 $ 142, Passenger Facility Charges Passenger Facility Charges (PFCs) are fees imposed on enplaning passengers by airports to finance eligible airport related projects that preserve or enhance safety, capacity, or security of the national air transportation system; reduce noise or mitigate noise impacts resulting from an airport; or furnish opportunities for enhanced competition between or among carriers. Both the fee and the intended projects are reviewed and approved by the Federal Aviation Administration (FAA). Airlines operating at ONT have been collecting PFCs on behalf of ONT. PFCs are recorded as non-operating revenue and presented as restricted assets in the financial statements. ONT has received approvals from FAA to impose PFCs for various projects. On October 19, 2012, the FAA approved the reduction of the PFC rate from $4.50 to $2.00 per enplaned passenger effective January 1, The application did not change ONT s collection authority of $242.4 million but extended the collection period through October LA/Ontario International Airport FY 2015 Annual Financial Report 45

76 Notes to the Financial Statements June 30, 2015 and 2014 (continued) The following project summary has been approved by FAA as of June 30, 2015 (amounts in thousands): Terminal development $ 98,953 Noise mitigation 84,774 Land acquisition 33,680 Airfield development and equipment 25,030 Total $ 242,437 PFCs collected and the related interest earnings through June 30, 2015 and 2014 were as follows (amounts in thousands): Amount collected $ 172,930 $ 169,318 Interest earnings 44,956 44,527 Total $ 217,886 $ 213,845 As of June 30, 2015 and 2014, cumulative expenditures to date on approved PFCs projects, totaled $174.1 million and $174.1 million, respectively. 9. Customer Facility Charges In November 2001, the Board approved the collection of a state-authorized Customer Facility Charges (CFCs) from car rental agencies serving ONT. State law allows airports to collect a fee of $10 per on-airport rental car agency transaction to fund the development of consolidated car rental facility and common-use transportation system. CFCs are recorded as non-operating revenue and presented as restricted assets in the financial statements. CFCs collected and the related interest earnings through June 30, 2015 and 2014 were as follows (amounts in thousands): As of June 30, 2015 and 2014, cumulative expenditures to date on approved CFCs projects totaled $51.2 million and $48.0 million, respectively. 10. Related Party Transactions Amount collected $ 54,072 $ 50,234 Interest earnings Total $ 54,632 $ 50,763 ONT shares certain administrative functions with LAX including but not limited to legal, human services, and financial services. For the fiscal years ended June 30, 2015 and 2014, the amount allocated to ONT for such services were $6.9 million and $7.2 million, respectively. 46 LA/Ontario International Airport FY 2015 Annual Financial Report

77 11. Pension and Other Postemployment Benefit Plans a. Description of Plans The City contributes to a single-employer defined benefit pension plan, the Los Angeles City Employees Retirement System (LACERS), to provide retirement benefits to its civilian (other than Department of Water and Power) employees. The City also provides single-employer other postemployment benefit (OPEB) healthcare plan through LACERS. All full-time employees of LAWA are eligible to participate in both plans. The City Charter assigns the administration of the plans to the LACERS Board of Administration. The LACERS issues a publicly available financial report that includes financial statements and required supplementary information for the plans. That report may be obtained by writing or calling: Los Angeles City Employees Retirement System, 202 W. First Street, Suite 500, Los Angeles, CA , (800) As a City department, LAWA shares in the risks and costs with the City. LAWA presents the related defined benefit disclosures as a participant in a single employer plan of the City. Pension and other postemployment benefits are established pursuant to the City ordinance. The City Council may, by an ordinance adopted pursuant to specific requirements (approved by not less than 2/3 of the City Council, subject to the veto of the Mayor and override by City Council by 3/4 of City Council), modify or add to the benefits set forth in the Los Angeles Administrative Code or change conditions of entitlement. However, the City Council may not increase or modify benefits if doing so would violate limitations imposed by federal or state law. As a further condition to the final adoption of benefit modifications, it shall be required that the City Council be advised in writing by an enrolled actuary as to the cost of benefit increases. i) Pension Plan LACERS provides service retirement, disability, death and survivor benefits to eligible employees. Employees of the City become members of LACERS on the first day of employment in a position with the City in which the employee is not excluded from membership. Members employed prior to July 1, 2013 are designated as Tier 1 and those employed on or after July 1, 2013 are designated as Tier 2 (unless a specific exemption applies to the employee, providing a right to Tier 1 status). Membership to Tier 1 is now closed to new entrants. Tier 1 members are eligible for normal service retirement benefits once they attain the age of 70, or the age of 60 with 10 or more years of continuous service, or the age of 55 with 30 or more years of service. Tier 2 members are eligible for normal service retirement benefits once they attain the age of 70, or the age of 65 with 10 or more years of continuous service. Tier 1 members are eligible for disability retirement once they have 5 or more years of continuous service. Tier 2 members are eligible for disability retirement once they have 10 or more years of continuous service. Under the Tier 1 formula, the monthly service retirement allowance at normal retirement age is 2.16% of final average monthly compensation per year of service credit. Reduced retirement allowances are available for early retirement for Tier 1 members reaching age 55 with 10 or more years of continuous service, or at any age with 30 or more years of service. LA/Ontario International Airport FY 2015 Annual Financial Report 47

78 Notes to the Financial Statements June 30, 2015 and 2014 (continued) Under the Tier 2 formula, the monthly service retirement allowance at normal retirement age is 2.00% of final average monthly compensation per year of service credit. Reduced retirement allowances are available for early retirement for Tier 2 members reaching age 55 with 10 or more years of continuous service. Under Tier 1, pension benefits are calculated based on the highest average salary earned during a 12- month period (including base salary plus regularly assigned bonuses or premium pay). Under Tier 2, pension benefits are calculated based on the highest average salary earned during a 36-month period (limited to base pay). For Tier 1 members, the maximum monthly retirement allowance is 100% of the final average monthly compensation. For Tier 2 members, the maximum monthly retirement allowance is 75% of the final average monthly compensation. In lieu of the service retirement allowance under the Tier 1 or Tier 2 formula ( unmodified option ), the member may choose an optional retirement allowance. The unmodified option provides the highest monthly benefit and a 50% continuance to an eligible surviving spouse or domestic partner for Tier 1 members (no continuance is provided to beneficiaries of Tier 2 members under the unmodified option). The optional retirement allowances require a reduction in the unmodified option amount in order to allow the member the ability to provide various benefits to a surviving spouse, domestic partner, or named beneficiary. LACERS provides annual cost-of-living adjustments (COLAs) to all retirees. The cost-of-living adjustments are made each July 1 based on the percentage change in the average of the Consumer Price Index for the Los Angeles-Riverside-Orange County Area--All Items For All Urban Consumers. It is capped at 3.0% for Tier 1 and 2.0% for Tier 2. Tier 2 members may purchase additional 1% COLA protection at full actuarial cost. The City contributes to the retirement plan based upon actuarially determined contribution rates adopted by the Board of Administration. Employer contribution rates are adopted annually based upon recommendations received from LACERS actuary after the completion of the annual actuarial valuation The average employer contribution rates were 20.77% and 19.84% of compensation 3 as of June 30, 2015 and June 30, 2014, respectively. All members are required to make contributions to LACERS regardless of the tier in which they are included. Currently, most Tier 1 members contribute at 11% of compensation and all Tier 2 members contribute at 10% of compensation. Funding Policy for the Pension Plan The City makes contributions equal to the normal cost adjusted by an amount to amortize any surplus or unfunded actuarial accrued liability (UAAL). Both the normal cost and the actuarial accrued liability are determined under the Entry Age cost method and are calculated on an individual basis. Entry age is calculated as age on the valuation date minus years of service. 3 After adjustments to phase in over five years the impact of new actuarial assumptions (as a result of the June 30, 2011 Triennial Experience Study) on the City s contributions. 48 LA/Ontario International Airport FY 2015 Annual Financial Report

79 Under the current funding policy, changes in the UAAL due to actuarial gains/losses are amortized over separate 15 year periods. Any changes in the UAAL due to assumption or method changes are amortized over separate 20 year periods. Plan changes, including the 2009 ERIP, are amortized over separate 15 year periods. Future Early Retirement Incentive Program (ERIP) will be amortized over 5 years. Any actuarial surplus is amortized over 30 years. All the bases on or before June 30, 2012, except those arising from the 2009 ERIP and the two GASB Statements No and 27 5, were combined and amortized over 30 years effective June 30, The recommended contribution is set equal to the greater of the current funding policy or the minimum Annual Required Contribution (ARC) as determined by the then current GASB Statements No. 25 and 27. In particular, an additional contribution due to the application of the 40-year minimum amortization requirement for both fiscal years 2004 and 2005 is included in the calculation of the recommended contribution. ONT s Contributions to t Pension Plan ONT s contributions to the Pension Plan for the year ended June 30 (amounts in thousands): ONT's required contributions to the Pension Plan $ 3,286 $ 3,046 The ONT contributions made for the Pension Plan under the required contribution category in the amount of $3.3 million and $3.0 million for fiscal year 2015 and 2014, respectively, were equal to 100% of the actuarially determined contribution of the employer. ii) Other Postemployment Benefit Healthcare Plan (OPEB) LACERS provides postemployment health care benefits to eligible retirees of OPEB, and, if the member retires under Tier 1 membership, to their spouses/domestic partners as well. Prior to the retirement effective date of July 1, 2011, the benefits of this single employer postemployment benefit health care plan were available to all employees who 1) participate in the Pension Plan; 2) have at least 10 years of service with LACERS; and 3) enrolled in a system-sponsored medical or dental plan or are a participant in the Medical Premium Reimbursement Program (MPRP). The retiree or Tier 1 surviving spouse/domestic partner can choose from the health plans that are available, which include medical, vision, and dental benefits, or participate in the MPRP if he/she resides in an area not covered by the available medical plans. The retiree or Tier 1 surviving spouse/domestic partner receives medical subsidies based on service years. The dental subsidies are provided to the retirees only, based on years of service. The maximum subsidies are set annually by the LACERS Board of Administration. 4 GASB Statement No. 25, Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans, issued in November 1994, was amended by GASB Statement No. 67, Financial Reporting for Pension Plans an amendment of GASB Statement No. 25, issued in June GASB Statement No. 27, Accounting for Pensions by State and Local Governmental Employers, issued in November 1994, was amended by GASB Statement No. 68, Accounting and Financial Reporting for Pension an amendment of GASB Statement No. 27, issued in June LA/Ontario International Airport FY 2015 Annual Financial Report 49

80 Notes to the Financial Statements June 30, 2015 and 2014 (continued) During the 2011 fiscal year, the City adopted an ordinance (Freeze Ordinance) to freeze the maximum medical subsidy at $1,190 for those members who retire on or after July 1, However, members who at any time prior to retirement contribute the additional 2% or 4% of pay pursuant to specific ordinances are exempted from the freeze and obtain a vested right to future increases in the maximum medical subsidy at an amount not less than the dollar increase in the Kaiser two-party non- Medicare Part A and Part B premium. Postemployment health care benefits for the Tier 2 members differ from those for the Tier 1 members in their annual subsidy accrual after 10 years of service; Tier 1 earns 4% per year while Tier 2 earns 3% per year. As mentioned above, spouses/domestic partners of Tier 2 members are not entitled to OPEB. Funding Policy for OPEB The City Charter requires periodic employer contributions at actuarially-determined rates that, expressed as percentages of annual covered payroll together with certain fixed amounts, are sufficient to accumulate the required assets to pay benefits when due. Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, investment returns, and the health care cost trends. The funded status of the plan and the annual required contributions of the employer, determined by the annual actuarial valuations, are subject to continual revisions as actual results are compared with past expectations and new estimates are made about the future. ONT s Contributions to OPEB ONT s contributions to OPEB for the year ended June 30 (amounts in thousands): ONT's required contributions to OPEB $ 874 $ 845 ONT s contributions made for OPEB, in the amount of $0.9 million and $0.8 million for fiscal year 2015 and 2014, respectively, represents 100% of the Annual Required Contribution (ARC) as defined by GASB Statements No and No GASB Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, issued in April GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefit Plans Other Than Pension, issued in June LA/Ontario International Airport FY 2015 Annual Financial Report

81 b. Net Pension Liability, Pension Expenses and Deferred Outflows/Inflows of Resources Related to Pensions for Fiscal Year 2015 As of the reporting date June 30, 2015 (measurement date of June 30, 2014), ONT reported its proportionate shares of Net Pension Liability (NPL) 8 as follows (amounts in thousands): Reporting date 6/30/15 Measurement date 6/30/14 FY 2015 ONT's proportionate share of NPL $ 37,967 ONT s NPL was measured as the proportionate share of the NPL based on the employer contributions made by ONT during fiscal year The NPL was measured as of June 30, 2014 and determined based upon the Pension Plan s Fiduciary Net Position (plan assets) and Total Pension Liability from actuarial valuations as of June 30, ONT s proportionate share of the NPL as of June 30, 2015 (measurement date June 30, 2014) and 2014 (measurement date June 30, 2013) was as follows (amounts in thousands): NPL Proportion (%) Proportion - Reporting date June 30, 2015 (measurement date June 30, 2014) $ 37, % Proportion - Reporting date June 30, 2014 (measurement date June 30, 2013) $ 41, % Change - Decrease $ (3,739) (0.030%) 8 The NPL data for prior year, fiscal year 2014, was not restated because all of the information available to restate prior year amounts was not readily available. LA/Ontario International Airport FY 2015 Annual Financial Report 51

82 Notes to the Financial Statements June 30, 2015 and 2014 (continued) For the year ended June 30, 2015, ONT recognized pension expense of $3.1 million. At June 30, 2015, ONT reported deferred outflows of resources and deferred inflows of resources related to pensions from the following resources (amounts in thousands): Deferred outflows Deferred inflows of resources of resources Pension contributions subsequent to measurement date $ 3,286 $ -- Differences between expected and actual experience -- 1,133 Changes of assumptions 5, Net difference between projected and actual earnings on pension plan investments -- 6,935 Differences arising from changes proportion and differences between employer contributions and proportionate share of contributions -- 1,188 Total $ 8,785 $ 9,256 $3.3 million reported as deferred outflows of resources related to contributions subsequent to the measurement date will be recognized as a reduction of the NPL in the year ended June 30, Other amounts reported as deferred outflows of resources and deferred inflows of resources related to pensions will be recognized as pension expense as follows (amounts in thousands): Fiscal year ending Amount 2016 $ (1,046) 2017 (1,046) 2018 (1,046) 2019 (1,046) LA/Ontario International Airport FY 2015 Annual Financial Report

83 c. Actuarial Assumptions for the June 30, 2014 Measurement Date for Fiscal Year 2015 The total pension liability as of June 30, 2014 was measured by an actuarial valuation as of June 30, 2014 using the following actuarial assumptions 9, applied to all periods included in the measurement: Inflation: 3.25% Discount rate: 7.50% Salary increases: Investment rate of return: Post-Retirement Mortality Rates: Healthy Members and all Beneficiaries: Disabled Members: Termination Rates before Retirement: Pre-Retirement Mortality: Retirement Age and Benefit for Inactive Vested Participants: Exclusion of Inactive Members: Ranges from 4.40% to 10.50% based on years of service, including inflation 7.50%, net of pension plan investment expense, including inflation RP-2000 Combined Healthy Mortality Table projected with Scale BB to 2020, set back one year for males and with no setback for females. RP-2000 Combined Healthy Mortality Table projected with Scale BB to 2020, set forward seven years for males and set forward eight years for females. RP-2000 Combined Healthy Mortality Table projected with Scale BB to 2020, set back one year for males and with no setback for females. Pension benefit paid at the later of age 58 or the current attained age. For reciprocals, 4.40% compensation increases per annum. All inactive participants are included in the valuation. Definition of Active Members: First day of biweekly payroll following employment for new department employees or immediately following transfer from other city department. Unknown Data for Members: Percent Married/Domestic Partner: Age of Spouse: Same as those exhibited by members with similar known characteristics. If not specified, members are assumed to be male. 76% of male participants; 50% of female participants. Male retirees are assumed to be 4 years older than their female spouses. Female retirees are assumed to be 2 years younger than their male spouses. Service: Future Benefit Accruals: Other Reciprocal Service: Employment service is used for eligibility determination purposes. Benefit service is used for benefit calculation purposes. 1.0 year of service per year. 5% of future inactive vested members will work at a reciprocal system. Consumer Price Index: Increase of 3.25% per year; benefit increases due to CPI subject to 3.00% maximum for Tier 1 and 2.00% maximum for Tier 2. Employee Contribution Crediting Rate: Actuarial Cost Method: Based on average of 5-year Treasury note rate. An assumption of 3.25% is used to approximate that crediting rate in this valuation. Entry Age Cost Method. 9 The actuarial assumptions used in this June 30, 2014 valuation were based on the results of an experience study for the period from July 1, 2011 through June 30, They are the same as the assumptions used in the June 30, 2014 funding actuarial valuation for LACERS. LA/Ontario International Airport FY 2015 Annual Financial Report 53

84 Notes to the Financial Statements June 30, 2015 and 2014 (continued) d. Discount Rate for Fiscal Year 2015 The discount rate used to measure the total pension liability was 7.50% as of June 30, The projection of cash flows used to determine the discount rate assumed plan member contributions will be made at the current contribution rate and that employer contributions will be made at rates equal to the actuarially determined contribution rates. For this purpose, only employee and employer contributions that are intended to fund benefits of current plan members and their beneficiaries are included. Projected employer contributions that are intended to fund the service costs for future plan members and their beneficiaries, as well as projected contributions from future plan members, are not included. Based on those assumptions, the Plan's Fiduciary Net Position was projected to be available to make all projected future benefit payments for current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability as of both June 30, 2014 and June 30, The long-term expected rate of return on pension plan investments was determined using a buildingblock method in which expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These returns are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage, adding expected inflation, and subtracting expected investment expenses and a risk margin. The target allocation and projected arithmetic real rates of return for each major asset class, after deducting inflation, but before deducting investment expenses, used in the derivation of the long-term expected investment rate of return assumption are summarized in the following table: Asset Class Target Allocation Long-Term (Arithmetic) Expected Real Rate of Return U.S. Large Cap Equity 20.40% 5.94% U.S. Small Cap Equity 3.60% 6.64% Developed 21.75% 6.98% International Emerging Market Equity 7.25% 8.48% Core Bonds 16.53% 0.71% High Yield Bonds 2.47% 2.89% Private Real Estate 5.00% 4.69% Cash 1.00% -0.46% Credit Opportunities 5.00% 3.07% Public Real Assets 5.00% 3.41% Private Equity 12.00% 10.51% Total % 54 LA/Ontario International Airport FY 2015 Annual Financial Report

85 Sensitivity of the Proportionate Share of the Net Pension Liability to Changes in the Discount Rate The following presents ONT s proportionate share of the NPL as of June 30, 2014, calculated using the discount rate of 7.50%, as well as what ONT s proportionate share of NPL would be if it were calculated using a discount rate that is 1 percentage point lower (6.50%) or 1 percentage point higher (8.50%) than the current rate (amounts in thousands): ONT 1% decrease 6.50% Net Pension Liability $56,681 Current discount rate 7.50% Net Pension Liability $37,967 1% increase 8.50% Net Pension Liability $22,415 Pension Plan Fiduciary Net Position The Pension Plan s fiduciary net position has been determined on the same basis used by the Pension Plan and the plans basis of accounting, including policies with respect to benefit payments and valuation of investments. Detailed information about LACERS net position is available in the separately issued LACERS financial reports, which can be found on the LACERS website. e. Payable to the Pension Plan for Fiscal Year 2015 At June 30, 2015, ONT did not have any payable to be reported for the outstanding amount of contributions to the pension plan required for the year ended June 30, f. Funding Policy for Fiscal Year 2014 The City s annual costs for the plans are calculated based on the annual required contribution of the employer, an amount actuarially determined in accordance with the parameters of the applicable GASB statements. The actuarially determined contribution rates as a percentage of covered payroll were 25.33% and 18.32% for Tier 1 and Tier 2 members respectively, in fiscal year The required contribution rates were based on the June 30, 2012 actuarial valuations. ONT paid 100% of its annual contributions of $3.0 million to the Pension Plan for the fiscal year ended June 30, LA/Ontario International Airport FY 2015 Annual Financial Report 55

86 Notes to the Financial Statements June 30, 2015 and 2014 (continued) 12. Risk Management The Risk Management Division (RMD) administers LAWA s risk and claims management program. By implementing a comprehensive risk identification, assessment, and treatment process, the program addresses key risks that may adversely affect LAWA s ability to meet its business goals and objectives. LAWA maintains insurance coverage of $1.3 billion for general aviation liability and $1.0 billion for war and allied perils. Additional insurance coverage is carried for general all risk property insurance for $2.3 billion, that includes $250.0 million for boiler and machinery, and $25.0 million for earthquake. Deductibles for these policies are $10,000 per claim with a $400,000 annual aggregate for general liability, and $100,000 per occurrence and annual aggregate for general property. Historically, no liability or property claims have reached or exceeded the stated policy limits. ONT also maintains catastrophic loss fund for claims or losses that may exceed insurance policy limits. Commercial insurance is used where it is legally required, contractually required, or judged to be the most effective way to finance risk. For fiscal years 2015, 2014, and 2013, no claims were in excess of ONT s insurance coverage. ONT is self-insured as part of the City s program for workers compensation. All workers compensation cases are processed by the City. Liability and risk are retained by ONT. The actuarially determined accrued liability for workers compensation includes provision for incurred but not reported claims and loss adjustment expenses. The present value of the estimated outstanding losses was calculated based on a 3% yield on investments. ONT s accrued workers compensation liability at June 30, 2015 and 2014 was $4.3 million and $4.9 million, respectively. The changes in ONT s estimated claims payable are as follows (amounts in thousands): June Balance at beginning of year $ 4,871 $ 4,895 $ 3,878 Provision for current year's events and changes in provision for prior years' events ,440 Claims payments (533) (548) (423) Balance at end of year $ 4,338 $ 4,871 $ 4,895 Current portion $ 566 $ 524 $ LA/Ontario International Airport FY 2015 Annual Financial Report

87 13. Commitments, Contingencies, and Other Matters a. Commitments Commitments for construction of capital assets and purchase of materials and supplies were $0.3 million and $1.3 million as of June 30, 2015 and 2014, respectively. b. Aviation Security Concerns about the safety and security of airline travel and the effectiveness of security precautions may influence passenger travel behavior and air travel demand, particularly in the light of existing international hostilities, potential terrorist attacks, and world health concerns. Intensified security precautions have been instituted by government agencies, airlines, and airport operators since the September 11, 2001 terrorist attacks. ONT is unable to predict: (a) the likelihood of future incidents of terrorism and other airline travel disruptions; (b) the impact of the aforementioned security issues on its operations and revenues; and (c) financial impact to the airlines operating at ONT. c. Environmental Issue The State Water Resources Control Board (SWRCB) issued a Notice of Violation (NOV) to LAWA generally alleging violations of underground storage tank (UST) construction, monitoring, and testing laws at facilities where LAWA owns and operates USTs. LAWA owns and/or operates three USTs at ONT. The NOV did not specify any particular violations but the SWRCB subsequently identified a number of alleged violations that are under review along with continued improvement of LAWA s overall UST compliance program. d. City Financial Challenges Based on the most recent General Fund Budget Outlook prepared by the City Administrative Officer (CAO) in connection with the fiscal year 2016 adopted budget, the City would face a budget gap of $90.0 million in fiscal year 2017 and $51.0 million in fiscal year 2018 without corrective action. Based on the assumptions of the Budget Outlook, this deficit would be eliminated by fiscal year The City generally accomplishes such balancing through a combination of revenue increases, expenditure reductions and transfer from reserves. LAWA, as a proprietary department under the City Charter, is vested with the management and control of its assets. The budgetary challenges of the City s General Fund as well as the mitigating measures implemented by the Mayor and City Council do not directly affect ONT s operations. However, auxiliary services provided to LAWA by other City departments may be impacted. In addition, the City s budget challenges may have an adverse effect on the trading value of ONT s outstanding and future bond issues. LA/Ontario International Airport FY 2015 Annual Financial Report 57

88 Notes to the Financial Statements June 30, 2015 and 2014 (continued) e. LA/ONT International Airport Local Control In December 2011, the City of Ontario proposed to LAWA that the operations of ONT be transferred from the City of Los Angeles to the City of Ontario under certain terms. The terms included, among others, paying the City of Los Angeles $50 million and assumption by the City of Ontario of the existing bonded debt of ONT. In August 2012, the San Bernardino County Board of Supervisors approved the creation of the Ontario International Airport Authority (OIAA) to oversee ONT should the City of Los Angeles relinquish control. The OIAA is a joint powers arrangement between the County of San Bernardino and the City of Ontario. In September 2012, as directed by the Trade, Commerce and Tourism Committee of the Los Angeles City Council, the City Administrative Officer (CAO) issued a report related to ONT. The report recommended that the Mayor and Council decline the December 2011 proposal of the City of Ontario. The CAO further recommended that LAWA and the City shall negotiate with the City of Ontario, County of San Bernardino, OIAA, and other primary stakeholders to determine the most effective and appropriate ownership and management alternative, and the assigned value of such alternative for ONT. On June 3, 2013, the City of Ontario filed a complaint against the City of Los Angeles, seeking, among other things, (i) damages for the alleged breach of contract, breach of implied covenant of good faith and fair dealing, and breach of fiduciary duty, in connection with LAWA s operation and management of ONT; and (ii) to rescind or reform the agreements under which LAWA obtained ownership and control of ONT from the City of Ontario (Ontario Litigation). The trial court has dismissed the City of Ontario s rescission and reformation claims, but reserved the City of Ontario s damages claims for trial. As of the report issued date, no trial date in the Ontario Litigation is set and the parties are negotiating a potential settlement which may result in the transfer of ONT and certain adjacent property to a joint powers authority of the County of San Bernardino and the City of Ontario called the Ontario International Airport Authority (OIAA). Any such settlement and the culmination of the transactions contemplated thereby may be subject to the approval of, among others, the Board of Airport Commissioners of the City of Los Angeles, the City Council of the City of Los Angeles, the City Council of the City of Ontario, OIAA, the FAA and the court. No assurance can be given that (i) the parties to the Ontario Litigation may reach a settlement, (ii) any settlement reached by the parties to the Ontario Litigation or any transactions contemplated by any such settlement will be approved as described above, (iii) if a settlement is not reached, whether the Ontario Litigation will continue, (iv) if the Ontario Litigation continues, the outcome of the Ontario Litigation on LAWA would not be material. 58 LA/Ontario International Airport FY 2015 Annual Financial Report

89 Required Supplementary Information

90 Required Supplementary Information

91 Los Angeles World Airports (Department of Airports of the City of Los Angeles) LA/Ontario International Airport Required Supplementary Information Last Ten Fiscal Years Ended June 30* (amounts in thousands) Schedule of ONT's Proportionate Share of the Net Pension Liability 2015 ONT's Proportion of the Net Pension Liability 0.85% ONT's Proportionate share of the Net Pension Liability $ 37,967 ONT's Covered-employee payroll (1) $ 15,380 ONT's Proportionate share of the Net Pension Liability as a percentage of its covered-employee payroll % ONT's Proportionate share of Pension Plan's Fiduciary Net Position $ 100,425 ONT's Proportionate share of Pension Plan's Total Pension Liability $ 138,393 Pension Plan's Fiduciary Net Position as a percentage of the Total Pension Liability 72.57% Notes to schedule: (1) Covered-employee payroll represents the collective total of the LACERS eligible wages of all LACERS membership tiers. Non-pensionable wages was not included because the information was not readily available. (2) Changes of assumptions: The June 30, 2014 calculations reflected various assumptions changes based on the triennial experience study for the period from July 1, 2011 through June 30, The increase of the Pension Plan's Total Pension Liability is primarily due to the lowered assumed investment rate of return, from 7.75% in fiscal year 2013 to 7.50% in fiscal year 2014, and longer assumed life expectancies for members and beneficiaries. * Since fiscal year 2015 was the first year of implementation, only one year is shown. LA/Ontario International Airport FY 2015 Annual Financial Report 59

92 Los Angeles World Airports (Department of Airports of the City of Los Angeles) LA/Ontario International Airport Required Supplementary Information Last Ten Fiscal Years Ended June 30* (amounts in thousands) Schedule of Contributions 2015 Contractually required contribution (actuarially determined) $ 3,286 Contributions in relation to the actuarially determined contributions 3,286 Contribution deficiency (excess) $ -- ONT's covered-employee payroll (1) $ 15,380 ONT's Contributions as a percentage of covered-employee payroll 21.37% Notes to schedule: (1) Covered-employee payroll represents the collective total of the LACERS eligible wages of all LACERS membership tiers. Non-pensionable wages was not included because the information was not readily available. * Since fiscal year 2015 was the first year of implementation, only one year is shown. 60 LA/Ontario International Airport FY 2015 Annual Financial Report

93 Notes to schedule: Valuation date: Actuarially determined contribution rates are calculated as of June 30, two years prior to the end of the fiscal year in which the contributions are reported. Methods and assumptions used to determine contribution rates Actuarial cost method Amortization method Amortization period Asset Valuation Method Entry age actuarial cost method, level percent of salary. Level percent of payroll - assuming a 4.0% increase in total covered payroll. Multiple layers - closed amortization period. Actuarial gains/losses are amortized over 15 years. Assumption or method changes are amortized over 20 years. Plan changes, including the 2009 ERIP, are amortized over 15 years. Future ERIPs will be amortized over five years. Actuarial surplus is amortized over 30 years. The existing layers on June 30, 2012, except those arising from the 2009 ERIP and the two GASB 25/27 layers, were combined and amortized over 30 years. Market valuse of assets less unrecognized returns in each of the last seven years. Unrecognized return is equal to the difference between the actual market return and the expected return on the market value, and is recognized over a seven-year period. The actuarial value of assets cannot be less than 60% or great than 140% of the market value of assets. An ad hoc change was made in 2014 to combine the unrecognized returns and losses of prior years as of June 30, 2013 into one layer and recognize it evenly over six years from fiscal year through fiscal year * Since fiscal year 2015 was the first year of implementation, only one year is shown. LA/Ontario International Airport FY 2015 Annual Financial Report 61

94 Los Angeles World Airports (Department of Airports of the City of Los Angeles) LA/Ontario International Airport Required Supplementary Information Last Ten Fiscal Years Ended June 30* (amounts in thousands) Notes to schedule (continued): June 30, 2013 Investment rate of return 7.75% Inflation rate 3.50% Real across-the-board salary increase 0.75% Projected salary increases (1) Ranges from 11.25% to 6.50% for members with less than five years of service, and from 6.50% to 4.65% for members with five or more years of service. Cost of living adjustment (2) Tier 1: 3.00% Tier 2: 2.00% Mortality Healthy: RP-2000 Combined Healthy Mortality Table, set back two years for males and set back one year for females. (1) Includes inflation at 3.50% as of June 30, 2013 plus across-the-board salary increases of 0.75% plus merit and promotional increases. (2) Actual increases are contingent upon CPI increases with a 3.00% maximum for Tier 1 and a 2.00% maximum for Tier 2. * Since fiscal year 2015 was the first year of implementation, only one year is shown. 62 LA/Ontario International Airport FY 2015 Annual Financial Report

95 LA/Ontario International Airport FY 2015 Annual Financial Report 63

96 Compliance Section Contents Independent Auditor s Report on Compliance with Applicable Requirements of the Passenger Facility Charge Program and Internal Control Over Compliance Schedule of Passenger Facility Charge Revenues and Expenditures Notes to the Schedule of Passenger Facility Charge Revenues and Expenditures Independent Auditor s Report on Compliance with Applicable Requirements of the Customer Facility Charge Program and Internal Control Over Compliance Schedule of Customer Facility Charge Revenues and Expenditures Notes to the Schedule of Customer Facility Charge Revenues and Expenditures

97 Certified Public Accountants Sacramento Walnut Creek INDEPENDENT AUDITOR S REPORT ON COMPLIANCE WITH APPLICABLE REQUIREMENTS OF THE PASSENGER FACILITY CHARGE PROGRAM AND INTERNAL CONTROL OVER COMPLIANCE Oakland Los Angeles Century City Newport Beach San Diego To the Members of the Board of Airport Commissioners City of Los Angeles, California Compliance We have audited the compliance of LA/Ontario International Airport (ONT), a department component of Los Angeles World Airports (Department of Airports of the City of Los Angeles, California) (LAWA), an Enterprise Fund of the City of Los Angeles, with compliance requirements described in the Passenger Facility Charge Audit Guide for Public Agencies (Guide), issued by the Federal Aviation Administration, applicable to its passenger facility charge program for the fiscal year ended June 30, Management s Responsibility Compliance with the requirements referred to above is the responsibility of ONT s management. Auditor s Responsibility Our responsibility is to express an opinion on ONT s compliance based on our audit. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the Guide. Those standards and the Guide require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the compliance requirements referred to above that could have a material effect on the passenger facility charge program occurred. An audit includes examining, on a test basis, evidence about ONT s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination of ONT s compliance with those requirements. Opinion In our opinion, ONT complied, in all material respects, with the compliance requirements referred to above that are applicable to its passenger facility charge program for the fiscal year ended June 30, LA/Ontario International Airport FY 2015 Annual Financial Report 63

98 Independent Auditor s Report on Compliance with Applicable Requirements of the Passenger Facility Charge Program and Internal Control Over Compliance (continued) Internal Control Over Compliance Management of ONT is responsible for establishing and maintaining effective internal control over compliance with the compliance requirements referred to above. In planning and performing our audit, we considered ONT s internal control over compliance to determine the auditing procedures for the purpose of expressing our opinion on compliance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of ONT s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a compliance requirement will not be prevented, or detected and corrected, on a timely basis. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be deficiencies, significant deficiencies, or material weaknesses in internal control over compliance. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses, as defined above. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the Guide. Accordingly, this report is not suitable for any other purpose. Los Angeles, California November 5, LA/Ontario International Airport FY 2015 Annual Financial Report

99 Los Angeles World Airports (Department of Airports of the City of Los Angeles) LA/Ontario International Airport Schedule of Passenger Facility Charge Revenues and Expenditures For the Fiscal Years Ended June 30, 2015 and 2014 (amounts in thousands) Under (over) Passenger Expenditures revenues facility charge Interest Total on approved on approved revenue earned revenues projects projects Program to date as of June 30, 2013 $ 165,847 $ 44,062 $ 209,909 $ 172,721 $ 37,188 Fiscal year transactions Quarter ended September 30, ,401 (433) Quarter ended December 31, , ,003 Quarter ended March 31, Quarter ended June 30, , ,034 Program to date as of June 30, ,318 44, , ,124 39,721 Fiscal year transactions Quarter ended September 30, , ,060 Quarter ended December 31, Quarter ended March 31, , ,089 Quarter ended June 30, Unexpended passenger facility charge revenues and interest earned June 30, 2015 $ 172,930 $ 44,956 $ 217,886 $ 174,124 $ 43,762 Note: ONT changed the basis of presentation of this schedule from cash basis to accrual basis in fiscal year The prior year amounts were adjusted to reflect this change. See accompanying notes to the schedule of passenger facility charge revenues and expenditures. LA/Ontario International Airport FY 2015 Annual Financial Report 65

100 Los Angeles World Airports (Department of Airports of the City of Los Angeles) LA/Ontario International Airport Notes to the Schedule of Passenger Facility Charge Revenues and Expenditures For the Fiscal Years Ended June 30, 2015 and General The Aviation Safety and Capacity Expansion Act of 1990 (Public Law , Title II, Subtitle B) authorized the imposition of Passenger Facility Charges (PFCs) and use of the resulting revenue on Federal Aviation Administration (FAA) approved projects. On October 19, 2012, the FAA approved the reduction of the PFC rate from $4.50 to $2.00 per enplaned passenger effective January 1, The application did not change ONT s collection authority of $242.4 million but extended the collection period through October The details are as follows (amounts in thousands): Amount Charge Approval approved effective of use for Application number date date use U-00-ONT, closed 6/2/03 03/26/93 05/06/96 $ 27, C-00-ONT 04/28/98 04/28/98 118, C-00-ONT 12/01/07 03/22/07 96,649 Total $ 242,437 In May 1996, FAA approved LAWA s request to transfer a portion of PFCs revenues collected at LAX to fund certain projects at ONT. Accordingly, PFCs revenues totaling $126.1 million collected at LAX were transferred to ONT. 66 LA/Ontario International Airport FY 2015 Annual Financial Report

101 The general description of the approved projects and the expenditures to date are as follows (amounts in thousands): Approved projects Amount approved for Expenditures to date June 30 collection Terminal Development Program $ 27,334 $ 27,334 $ 27,334 Land Acquisition 33,680 34,376 34,376 Noise Mitigation 84,774 40,822 40,822 In-line Baggage Screening 48,621 47,032 47,032 Airfield Perimeter Section Fencing Enhancement Phase II 8,480 5,531 5,531 Runway 08L/26R Reconstruction 15,626 13,764 13,764 Implementation of IT Security Master Plan 16, Aircraft Rescue and Firefighting Vehicles ONT Master Plan 6,037 4,027 4,027 Total $ 242,437 $ 174,124 $ 174, Basis of Accounting Schedule of Passenger Facility Charge Revenues and Expenditures The accompanying Schedule of Passenger Facility Charge Revenues and Expenditures (Schedule) represents amounts reported to the FAA on the Passenger Facility Charge Quarterly Status Reports. The Schedule was prepared using the accrual basis of accounting. 3. Excess Project Expenditures The expenditures for ONT Land Acquisition- East Ontario project were in excess of the authorized amount. However, in accordance with FAA guidelines, if actual allowable project costs exceed the estimate contained in the PFCs application in which the authority was approved, the public agency may elect to increase the total approved PFCs revenue in that application by 15% or less. LA/Ontario International Airport FY 2015 Annual Financial Report 67

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103 Certified Public Accountants Sacramento Walnut Creek INDEPENDENT AUDITOR S REPORT ON COMPLIANCE WITH APPLICABLE REQUIREMENTS OF THE CUSTOMER FACILITY CHARGE PROGRAM AND INTERNAL CONTROL OVER COMPLIANCE Oakland Los Angeles Century City Newport Beach San Diego To the Members of the Board of Airport Commissioners City of Los Angeles, California Compliance We have audited the compliance of LA/Ontario International Airport (ONT), a department component of Los Angeles World Airports (Department of Airports of the City of Los Angeles, California) (LAWA), an Enterprise Fund of the City of Los Angeles, with compliance requirements described in the California Civil Code Section 1936, as amended by Senate Bill (SB) 1192 and Assembly Bill (AB) 359, applicable to its customer facility charge program for the fiscal year ended June 30, Management s Responsibility Compliance with the requirements referred to above is the responsibility of ONT s management. Auditor s Responsibility Our responsibility is to express an opinion on ONT s compliance based on our audit. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the California Civil Code Section 1936, as amended by SB 1192 and AB 359. Those standards and the California Civil Code Section 1936, as amended by SB 1192 and AB 359, require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the compliance requirements referred to above that could have a material effect on the customer facility charge program occurred. An audit includes examining, on a test basis, evidence about ONT s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination of ONT s compliance with those requirements. Opinion In our opinion, ONT complied, in all material respects, with the compliance requirements referred to above that are applicable to its customer facility charge program for the fiscal year ended June 30, LA/Ontario International Airport FY 2015 Annual Financial Report 69

104 Independent Auditor s Report on Compliance with Applicable Requirements of the Customer Facility Charge Program and Internal Control Over Compliance (continued) Internal Control Over Compliance Management of ONT is responsible for establishing and maintaining effective internal control over compliance with the compliance requirements referred to above. In planning and performing our audit, we considered ONT s internal control over compliance to determine the auditing procedures for the purpose of expressing our opinion on compliance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of ONT s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a compliance requirement will not be prevented, or detected and corrected, on a timely basis. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be deficiencies, significant deficiencies, or material weaknesses in internal control over compliance. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses, as defined above. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the California Civil Code Section 1936, as amended by SB 1192 and AB 359. Accordingly, this report is not suitable for any other purpose. Los Angeles, California November 5, LA/Ontario International Airport FY 2015 Annual Financial Report

105 Los Angeles World Airports (Department of Airports of the City of Los Angeles) LA/Ontario International Airport Schedule of Customer Facility Charge Revenues and Expenditures For the Fiscal Years Ended June 30, 2015 and 2014 (amounts in thousands) Over (under) Customer Expenditures revenues collected facility charge Interest Total on approved on approved revenue earned revenues projects projects Program to date as of June 30, 2013 $ 46,564 $ 504 $ 47,068 $ 44,571 $ 2,497 Fiscal year transactions Quarter ended September 30, Quarter ended December 31, Quarter ended March 31, (66) Quarter ended June 30, , Program to date as of June 30, , ,763 47,967 2,796 Fiscal year transactions Quarter ended September 30, Quarter ended December 31, Quarter ended March 31, (14) Quarter ended June 30, , , Unexpended customer facility charge revenues and interest earned June 30, 2015 $ 54,072 $ 560 $ 54,632 $ 51,186 $ 3,446 Note: ONT changed the basis of presentation of this schedule from cash basis to accrual basis in fiscal year The prior year amounts were adjusted to reflect this change. See accompanying notes to the schedule of customer facility charge revenues and expenditures. LA/Ontario International Airport FY 2015 Annual Financial Report 71

106 Los Angeles World Airports (Department of Airports of the City of Los Angeles) LA/Ontario International Airport Notes to the Schedule of Customer Facility Charge Revenues and Expenditures For the Fiscal Years Ended June 30, 2015 and General Assembly Bill 491 of the California Legislature (codified in California Civil Code Section 1936 et seq.) (Code) authorized the imposition of Customer Facility Charges (CFCs) and use of CFCs revenue to plan, finance, design, and construct on-airport consolidated rental car facilities (CRCF). On December 4, 2001, on recommendation of management, the Board approved the collection of CFCs of $10 on each car rental transaction at ONT effective January 1, Prior to the imposition of the CFCs, rental car operators at ONT were billed a fee that covered debt service requirements on the revenue bonds used to finance the ONT Ground Transportation Center (GTC), ground rent, maintenance and operation costs, and costs associated with the common use shuttle service. The CFCs collected at ONT is used to repay LAWA s $5.0 million direct investment in the GTC, offset costs associated with the common use shuttle service, and debt service requirements as previously discussed. CFCs collected, related interest earnings, and cumulative expenditures to date are summarized as follows (amounts in thousands): Amount collected $ 54,072 $ 50,234 Interest earnings Subtotal 54,632 50,763 Expenditures LAWA direct investment 5,860 5,430 Common use shuttle service 35,196 33,067 Debt service 10,130 9,470 Subtotal 51,186 47,967 Unexpended CFCs revenue and interest earnings $ 3,446 $ 2, Basis of Accounting Schedule of Customer Facility Charge Revenues and Expenditures The accompanying Schedule of CFCs Revenues and Expenditures was prepared using the accrual basis of accounting. 72 LA/Ontario International Airport FY 2015 Annual Financial Report

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108 Los Angeles Wor1d Ai'ports Administrative Offices 1 Wor1dWay Los Angeles, CA Mail: PO Box Los Angeles, CA TelephOtile-(310) Internet: Los Angeles International Airport 1 World Way Los Angeles, CA Telephone: (310) LNOntario International Airport 1923 East Avion Street Ontario, CA Telephone: (909) Van Nuys Airport Sherman Way, Suite 300 Van Nuys, CA Telephone: (818) As a covered entity under Title 11 of the Americans With Disabi I ity Act. the City of Los Angeles does not d iscri mi nate on the basis of disa bi I ity and. upon request. wi 11 provide reasonable accommodation to ensure access to its programs. services and activities.